BOJ thoughts

Will they or won't they?  After years of well-telegraphed Federal Reserve policy decisions, in some ways it is refreshing to see genuine market indecision in the run up to an important G3 policy announcement.  In the case of the BOJ, attention is particularly acute given the rushed stimulus package announcement, the BOJ's own recent history of not fulfilling market expectations, and the potential market reaction in then event of a no-go.

Let's look at them in turn.

The Abe stimulus package announcement looked as rushed as some of the Macro Boys' homework efforts during the last school year.  It smelled very much like wanted to get something, anything, on the tape before the BOJ meeting, so that the fiscal authorities could look at the central bank and say "your turn."   Whether the BOJ takes the bait is uncertain, however.  While the Y28 trillion headline amount is all well and good, at this juncture there is no detail as to the so-called "real water" component- the actual amount of new stimulus embedded in the package.   Certainly there's not enough there to support the adoption of any radical helicopter-type policies; we don't even know what if any fresh bond issuance there will be.  Thus, while the BOJ may feel some political pressure to do something, they may well decide that the appropriate response is a token gesture as devoid of substance as the stimulus announcement.

When it comes to guiding the market, Mr. Kuroda seems to have purloined Yellen's copy of "How to Lose Friends and Alienate People" at Davos and has been consulting it regularly.   First he introduces negative rates a few days after pooh-poohing the idea.  Then, despite high expectations of a policy shift a few months ago, he delivered a zero.  Clearly, one important area where the BOJ differs from the Fed is that they clearly don't give a monkey's what market expectations are.  Given the recent run-up in USD/JPY and the Nikkei over the last few weeks, there is clearly an embedded belief that the BOJ will deliver.  Mr. Kuroda, however, appears to have few if any a priori qualms about disappointing expectations in principle.

Perhaps the most compelling reason to do something is the potential fallout if they hold fire.  It seems likely that USD/JPY would drop a couple of percent at least, with the Nikkei tacking on a bit more.  Wityh USD/JPY at 112 or 120 that's not such a big problem; at 105 it does loom a little bit larger.   This could be viewed as rationalizing a token move, just to be seen to be doing something.

To be honest, Macro Man is torn as to whether the BOJ does anything or not.  It seems very unlikely indeed that any of the feasible policy options (buy a few more ETFs/JREITs, buy more JGBs) would confer many if any tangible benefits to the real economy.   In the case of buying more bonds or imposing a steeper negative rate, the negative externalities could easily outweigh the benefits.  As such, Macro Man looks for either no move or a modest increase to the ETF purchase amounts.

The market would probably take that as a disappointment, but hey; it's a tough world out there.  get used to it.