The asset management firm noted the bank’s recent decision to move away from the quantitative aspect of its policy and instead adopt an approach with the “pace of increase in the monetary base to fluctuate in the short run based on the market operations around the yield curve”.
“While we think policy will remain accommodative in the near term, we recognise that the new approach does present a way for the Bank to rein in its balance sheet if it finds it can control the yield curve with fewer purchases,” the company said.
The Bank of Japan has said it intends to keep its Japanese government bond buying at 80 trillion yen (AUD$1 trillion), though Standard Life Investments commented that this pace is unlikely to be maintained for long “given the margins for error in calculations of the determinants”.
“However, the decision is likely to remain data dependent even if price discovery in the market has diminished,” it added.
Standard Life Investments cautioned that the Bank of Japan may have “missed its mark” with regards to the reinforced inflation target, however, noting that the gap between the bank’s and the market’s core CPI forecasts was already significant, and may require further easing.
“We think that an expansion of asset purchases or the monetary base is unlikely, while an adjustment of the long-term rate would seem premature; meaning a cut in short-term interest rates is the most viable option,” the company warned.
“However, this risks seeming excessively short term, given the data continues to improve, and may further confuse its reaction function.”
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