Forex Flash: BoJ leadership paints broad strokes – UBS

FXstreet.com (Barcelona) - The Bank of Japan, under its new leadership, took a bolder than expected step into the realm of aggressive easing overnight. First it switched to a new monetary policy framework and is now targeting the monetary base rather than the overnight call rate. According to Research Analyst Gareth Berry at UBS, “This takes policy back to how it looked during the QE experiment of 2001-2006 when the level of current account balances at the BoJ became the policy target. Second, Rinban operations and the JGB component of the Asset Purchase Program were folded into a new purchasing program with the authority to buy all along the JGB curve - even out to the 40y point.”

This surpasses consensus market expectations of a more timid duration extension out to the 10y point only. Finally, in terms of size, the BoJ now expects its total holdings of JGBs to rise to Y140 trn by end-2013. Previous BoJ guidance had indicated only about Y114 trn by end-2013 (consisting of Y44 trn for the APP and about Y70 trn for Rinban). So, the overnight news represents a Y26 trn increase in JGB purchasing guidance, all condensed into a nine-month period.

This easily surpasses the largest guidance increases carried out by the Shirakawa-led BoJ where we only saw maximum incremental increases of Y10 trn at a time. In addition, JGB holdings are now forecast to rise a further Y50 trn during 2014 - which also represents an acceleration of JGB purchases over and above levels that Shirakawa had promised previously.