BoJ: Have They Reached the Logistical End of The Road?

What was most relevant from the BoJ was not what they did, it is what they didn’t do. Doubling their etf purchases is just more of the same and likely why the Nikkei rallied even though the yen is ripping higher. But, by not moving further into NIRP maybe is a reflection that Kuroda took note of the really cynical response on the part of both the Japanese banking system and Japanese households. Also, did the lack of any new bond purchases signal the realization that they’ve reached the logistical limits or is this just a pause before the Abe government reveals its next fiscal stimulus package? While maybe yes to the latter point, the JGB market sold off hard on the lack of new buying and maybe believes the former. The 10 yr JGB yield spiked 8 bps to -.19%, the least negative since June 27^th, the Monday after the UK vote. Bottom line, if NIRP is now being repudiated as a good idea (thank heavens if it is) and limits are being realized in the amount of government bonds that can be purchased, was the blow off rally in global sovereign bonds post UK vote the end for now in the global bond market rally? I believe it is very likely. Yields are up in the UK, Germany, France and the US in sympathy with JGB’s.

Very importantly, Kuroda specifically said “the yield curve has become very flat. We will inspect our policy comprehensively, including what impact that flattened curve will have on the profitability of financial institutions.” Will they get off NIRP? This analysis will be part of a broad review for the next meeting in September on how they will get to 2% inflation. They should just get off that goal already as there is no empirical meaning to that number. Kuroda also said they are “not thinking of monetizing government debt at all.” That of course is semantics but he’s specifically talking about primary buying of debt from the Japanese government directly.

The economic data out of Japan overnight was mixed. The labor market (this is where the reform in Japan is most needed) remains tight as the jobless rate fell one tenth to 3.1%, the lowest since 1995 as hires exceeded the increase in the labor force and the jobs to applicant ratio rose to 1.37, the most since August 1991. The weakness was seen in overall household spending which fell 2.2% y/o/y, much worse than the estimate of down .4%. Retail sales within that also fell more than expected y/o/y. Vehicle production, housing starts and construction orders were all negative y/o/y and inflation missed the estimates. The only positive was IP beat expectations.