Japan: BoJ unwinds non-conventional easing Quantitative

• Bank of Japan (BoJ) at today’s monetary meeting announced plans to scrap most of its non-conventional easing measures. In addition, BoJ published new macroeconomic forecasts. BoJ’s view of the economy remains benign and it expects deflation to prevail well into 2011.

• The termination of most of BoJ’s non-conventional easing measures should have little market impact, as their size is modest not least compared to ECB and Fed. Hence, unwinding the unconventional measures should be considerable less complex. An interest rate hike in Japan is still far off and BoJ is likely to lag Fed and ECB in the tightening cycle, albeit not as much as the market currently expects.

BoJ announces plan for scrapping non-conventional easing

Bank of Japan (BoJ) as expected left its leading O/N target rate unchanged at 0.1% at today’s monetary meeting. More importantly, BoJ announced plans to terminate most of its non-conventional easing measures. The most important changes are

• BoJ’s purchase of corporate bonds and commercial paper will not be extended beyond 2009.

• The special facility to facilitate corporate financing (SFFCF) will be extended until March 2010 to ensure stability in the money market towards the end of the fiscal year. The SFFCF gives unlimited access to 3-month liquidity against corporate debt collateral at the target O/N call rate (currently 0.1%).

• The expansion of the range of eligible collateral will remain in effect until the end of 2010.

• The complementary deposit facility will remain in effect for the time being. This facility pays interest rates on banks’ excess reserves, and hence is the floor for money market interest rates in a situation with ample liquidity.

• Purchase of government bonds is unchanged, as this is regarded a normal monetary instrument.