Japan's new monetary easing framework viewed as positive to the market

Another 10bps policy cut expected in the coming months.

The Bank of Japan (BoJ) introduced a new monetary easing framework, "QQE with yield curve control”, at its 20-21 September policy meeting, following its comprehensive policy assessment. The BoJ argued that this is a strengthening of its previous policy framework.

The new framework consists of two major components: (1) yield curve control, whereby the BoJ will control short- and long-term interest rates; and (2) the “inflation-overshooting commitment”, under which it will commit to expanding its monetary policy base until the 2% inflation target is achieved in a stable manner. The decision was made 7-2.

The BoJ also said it will increase the maximum mount of each of its ETF purchases, leaving the pace and structure of total asset purchases unchanged at JPY 80tn per year.

Commenting on the decision, Standard Chartered economist Betty Rui Wang said that the new framework is positive for market sentiment at the margin.

"We think the main purpose of the updated easing framework is to address financial institutions’ (FIs’) concerns about shrinking profits, declining lending margins and the flattening yield curve," she said.

The economist added that the new framework can also be viewed as an attempt to address market concern about monetary policy sustainability and financial market functioning.

"Few details have been provided on how to help drive inflation and inflation expectations, although the BoJ’s stronger commitment to expanding its monetary base until inflation exceeds 2% in a stable manner indicates that monetary easing may exist for longer than expected," she explained.

Cabinet Secretary Suga said the government welcomes the BoJ’s latest decision and the government and the BoJ will cooperate more closely in future to achieve the inflation target.

"The BoJ’s previous shock and awe tactics to drive up inflation appears to be over. We expect the BoJ to cut its policy rate by another 10bps in the coming months," said Betty.