Bank of Japan needs to reassure the market

Ahead of the Bank of Japan’s (BoJ) monetary policy meeting on 22/23 January, Katsunori Ogawa, Chief Portfolio Manager at SuMi TRUST, believes the BoJ needs to provide more reassurance to the market given uncertainty around the next central bank Governor and rumours surrounding policy changes:

“At the next Bank of Japan (BoJ) policy meeting on 22/23 January, we expect the central bank to hold its monetary stance. There has been recent anticipation around the BoJ’s move towards tapering but the likelihood of an immediate shift towards normalisation is low. However, market rumours have historically been a trigger for interest rate rises, and recent actions by the BoJ and the prospect of a new governor, are causing nervousness.

“Governor Kuroda, or his successor, will have to work to combat this uneasiness in the market surrounding policy changes. Governor Kuroda has indicated that he will persist with monetary easing until the 2% inflation target is reached but we feel that the BoJ has put too much emphasis on reaching this target. The central bank should be prepared to adapt policies according to the actual situation in the economic and financial markets without sticking too closely to the 2% target, as this was set as an emergency measure during a time of crisis.

“Looking at the global markets, stock and bond prices are high, while credit spread and volatility are low, meaning that almost all financial assets are in a high price range. This is likely due to a large amount of liquidity supplied by central banks across the world, allowing returns to be made even in an environment of low interest rates. As there is no specific concentration in a single asset, extreme overheating – as was the case in past bubbles – is unlikely to occur this time round, but the BoJ must remain cautious in case there is a sudden change of tide in the market.

“Financial markets are also expecting the pace of US tapering to remain gradual and stock markets to maintain current stability. However, an adjustment of monetary policy in the US has often triggered a global financial crisis, so the BoJ cannot afford excessive optimism.”