Arguably, the BoJ meeting is the most important macro event this week. Even more important than the Fed. While the Fed may or may not hint at a September rate cut, the market has already priced in a September cut and we still have two months of data to determine what will happen next.
The bigger event is that the Great Japanese Monetary Policy Experiment is starting to be unwound! A truly historic moment.
The consensus is for a JPY 2T/ year reduction in bond purchases, but the question of a hike still remains uncertain.
Let’s examine what to expect and what this means for global markets.
The Tapering of Bond Purchases
During the last meeting, the BoJ already announced that they will taper bond purchases and that the amount will be sizable. This is a major step for Japan since the QQE program started in 2001. The BoJ started outright bond purchases to provide the market with liquidity and has been using this primarily as a monetary policy tool, not to finance fiscal deficits. This has kept conditions easy and rates low.
At the moment, the BoJ’s guidance is to purchase JPY 6T per month of Japanese Government Bonds (JGBs) of varying maturities. While this is just the target, the actual amount of outright purchases has varied over the years to accommodate easier policy, particularly in times of stress.
And this has been an effective measure not just for Japan, but for global markets, as the liquidity flows through to other countries through bond and other asset purchases by the Japanese.