BOJ boosts ETF purchases, USD lending program

    Japan's central bank once again widened its highly accommodative monetary policy stance by increasing its purchases of exchange-traded funds (ETFs) and its U.S. dollar lending program to support Japanese firms' overseas activities.
    The Bank of Japan (BOJ), which surprised financial markets in January by applying a negative interest rate of minus 0.1 percent on banks' deposits that exceed reserve requirements, will double its purchases of ETFs to an annual pace of 6 trillion yen from 3.3 trillion and also double the U.S. dollar lending program to US$24 billion - about 2.5 trillion yen - from $12 billion to provide dollars for up to 4 years to support Japanese firms activities abroad through financial institutions.
    The latest initiative to boost economic activity and inflation was described as "enhancement of monetary easing" by the BOJ and aimed at preventing  international uncertainties, such as the U.K.'s decision to leave the European Union (EU) and slower growth in emerging markets, from leading to a deterioration in domestic business confidence and consumer sentiment as well as ensure smooth funding in foreign currencies by Japanese firms and financial institutions.
    The BOJ noted that Japan's government is currently compiling a large-scale stimulus package along with fiscal and structural policy initiatives, which together with its own measures should "provide synergy effects on the economy."  The package has been estimated at 20-30 trillion yen.
    The other planks in the BOJ's aggressive easing campaign, which goes back to April 2013 when it launched an aggressive campaign to rid the country of 15 years of deflation, were unchanged. This includes a goal of boosting the monetary base by an annual 80 trillion yen and applying a negative interest rate of minus 0.1 percent on some current account balances.
    Once again, the BOJ also lowered its forecast for economic growth in the current 2016 fiscal year, which began April 1, to 1.0 percent from 1.2 percent forecast in April, partly due to slow growth in emerging economies and uncertainties associated with the U.K. vote to leave the EU.
    The forecast for inflation was trimmed to 0.1 percent from 0.5 percent, reflecting an appreciation of the yen's exchange rate and a delay in any improvement to inflation expectations.
    The BOJ expects consumer price inflation to be slightly negative or around 0 percent due to the fall in energy prices, but then slowly accelerate toward the 2.0 percent target. In June Japan's headline inflation rate was steady at minus 0.4 percent .
    But for fiscal 2017 members of the BOJ's policy board raised their growth forecast to 1.3 percent from a previous 0.1 percent, reflecting the government's decision to postpone the planned hike in consumption taxes in April 2017 until October 2019 and demand linked to the Olympic Games.
    Inflation in 2017 is now seen rising to 1.7 percent, unchanged from April's forecast that excluded the impact of the planned hike in consumption tax to 10 percent from 8 percent, but below the previous 2.7 percent forecast for headline inflation.
    But the BOJ added that it expects the inflation rate to reach 2 percent during fiscal 2017 and then average around 2 percent thereafter.
    For fiscal 2018 the growth forecast was trimmed to 0.9 percent form 1.0 percent while the inflation forecast was unchanged at 1.9 percent.
    "Looking ahead, sluggishness is expected to remain in exports and production for some time, and the pace of economic recovery is likely to remain slow," the BOJ said, with domestic demand slowly trending higher and exports to rise as overseas economies, including advanced economies, strengthen.

   
    The Bank of Japan issued the following statement:

"Enhancement of Monetary Easing

1. Against the backdrop of the United Kingdom's vote to leave the European Union and the slowdown in emerging economies, uncertainties surrounding overseas economies have increased and volatile developments have continued in the global financial markets. In order to prevent these uncertainties from leading to a deterioration in business confidence and consumer sentiment as well as to ensure smooth funding in foreign currencies by Japanese firms and financial institutions, thereby supporting their proactive economic activities, at the Monetary Policy Meeting (MPM) held today, the Policy Board of the Bank of Japan decided upon the following.

1. (1)  An increase in purchases of exchange-traded funds (ETFs) by a 7-2 majority vote[Note 1]
   The Bank will purchase ETFs so that their amount outstanding will increase at an annual pace of about 6 trillion yen1 (almost double the previous pace of about 3.3 trillion yen).
   
   
2. (2)  Measures to ensure smooth funding in foreign currencies by Japanese firms and financial institutions by a unanimous vote
   a) Increasing the size of the Bank's lending program to support growth in U.S. dollars The Bank will increase the size of its lending program to support growth in U.S. dollars (the Special Rules for the U.S. Dollar Lending Arrangement to Enhance the Fund-Provisioning Measure to Support Strengthening the Foundations for Economic Growth Conducted through the Loan Support Program) to 24 billion USD (about 2.5 trillion yen; double the previous size of 12 billion USD). Under this lending program, the Bank provides its U.S. dollar funds for a period of up to 4 years to support Japanese firms' overseas activities through financial institutions.
   
   b) Establishing a new facility for lending securities to be pledged as collateral for the U.S. Dollar Funds-Supplying Operations The Bank will establish a new facility in which it lends Japanese government securities (JGSs) to financial institutions against their current account balances with the Bank so that these JGSs can be pledged as collateral for the U.S. Dollar Funds-Supplying Operations.

2. With regard to the guideline for money market operations, the guidelines for asset purchases except for ETF purchases, and the policy rate, the Bank decided to leave these unchanged.

1. (1)  Quantity Dimension: The guideline for money market operations
   The Bank decided, by an 8-1 majority vote, to set the following guideline for money market operations for the intermeeting period:[Note 2]
   The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen.
   
   
2. (2)  Quality Dimension: The guidelines for asset purchases
   With regard to the asset purchases, the Bank decided, by an 8-1 majority vote, to set the following guidelines:[Note 2]
   
   1. a)  The Bank will purchase Japanese government bonds (JGBs) so that their amount outstanding will increase at an annual pace of about 80 trillion yen. With a view to encouraging a decline in interest rates across the entire yield curve, the Bank will conduct purchases in a flexible manner in accordance with financial market conditions. The average remaining maturity of the Bank's JGB purchases will be about 7-12 years.
      
   2. b)  The Bank will purchase Japan real estate investment trusts (J-REITs) so that their amount outstanding will increase at an annual pace of about 90 billion yen.
      
   3. c)  As for CP and corporate bonds, the Bank will maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen, respectively.
      
      
      
      (3) Interest-Rate Dimension: The policy rate
      The Bank decided, by a 7-2 majority vote, to continue applying a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank.[Note 3]
      

      3. The Government is undertaking fiscal and structural policy initiatives, including a large-scale "stimulus package," which is currently being compiled. The Bank will pursue "Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate" including measures decided today and provide highly accommodative financial conditions. The Bank believes that these monetary policy measures and the Government's initiatives will produce synergy effects on the economy.
         
      4. The Bank will continue with "QQE with a Negative Interest Rate," aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will examine risks to economic activity and prices, and take additional easing measures in terms of three dimensions -- quantity, quality, and the interest rate -- if it is judged necessary for achieving the price stability target.[Note 4]
         
      5. As shown in the July 2016 Outlook for Economic Activity and Prices (Outlook Report) released today, there is considerable uncertainty over the outlook for prices against the background of uncertainties surrounding overseas economies and global financial markets. Against this backdrop, with a view to achieving the price stability target of 2 percent at the earliest possible time, the Bank will conduct a comprehensive assessment of the developments in economic activity and prices under "QQE" and "QQE with a Negative Interest Rate" as well as these policy effects at the next MPM. The Chairman instructed the staff to prepare for deliberations at the next meeting.
         
         
         NOTES:
         1 Of about 6 trillion yen, 300 billion yen is used in line with the implementation of a program for purchasing ETFs composed of stocks issued by firms that are proactively investing in physical and human capital, as decided at the MPM held in December 2015.  
         
         
         [Note 1] Voting for the action: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Mr. Y. Harada, Mr. Y. Funo, Mr. M. Sakurai, and Ms. T. Masai. Voting against the action: Mr. T. Sato and Mr. T. Kiuchi. Mr. T. Sato dissented considering that ETF purchases of about 6 trillion yen annually would be excessive in light of their adverse impact on the price mechanism in the stock market and the Bank's financial soundness. Mr. T. Kiuchi dissented because an increase in ETF purchases would (1) impair the Bank's financial soundness, (2) lead to a rise in volatility in the stock market, and (3) give a wrong impression that the Bank targeted stock prices.

         
         

         [Note 2] Voting for the action: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Mr. T. Sato, Mr. Y. Harada, Mr. Y. Funo, Mr. M. Sakurai, and Ms. T. Masai. Voting against the action: Mr. T. Kiuchi. Mr. T. Kiuchi proposed that the Bank conduct money market operations and asset purchases so that the monetary base and the amount outstanding of its JGB holdings increase at an annual pace of about 45 trillion yen, respectively. The proposal was defeated by a majority vote.
         [Note 3] Voting for the action: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Mr. Y. Harada, Mr. Y. Funo, Mr. M. Sakurai, and Ms. T. Masai. Voting against the action: Mr. T. Sato and Mr. T. Kiuchi. Mr. T. Sato and Mr. T. Kiuchi dissented considering that an interest rate of 0.1 percent should be applied to current account balances excluding the amount outstanding of the required reserves held by financial institutions at the Bank, because negative interest rates would impair the functioning of financial markets and financial intermediation as well as the stability of the JGB market.
         

         [Note 4] Mr. T. Kiuchi proposed that the Bank, with the aim to achieve the price stability target of 2 percent in the medium to long term, continue with asset purchases and a virtually zero interest rate policy as long as each of these policy measures was deemed appropriate under flexible policy conduct based on the examination from the two perspectives of the monetary policy framework. The proposal was defeated by an 8-1 majority vote. Voting for the proposal: Mr. T. Kiuchi. Voting against the proposal: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Mr. T. Sato, Mr. Y. Harada, Mr. Y. Funo, Mr. M. Sakurai, and Ms. T. Masai."

         
         

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