BOJ’s easing policy looks exhausted as its tapering continues

US Stock market rally takes a pause near record highs
Attacks on Saudi oil fields, turmoil in the US repo market and re-emerging doubts a trade deal at the end of the week have all played their part in keeping the key US market indices from breaking out to new highs. Also, with the Fed taking a more tentative step toward loosening its monetary policy and cutting its fund rate by only 25bps, there wasn’t much to get excited about. With S&P coming a few points short of hitting its new highs, we still believe that market looks poised for a breakout more than topping out close to its previous highs. Our own market have also followed suit with Topix

Oil price rebound proves short lived, Fed on top of rising repo rates
Indeed, the oil price rebound proved very short-lived and with US sending troops and air defence systems to better to protect Saudi’s oil facilities from any future attacks, the spike in the risk premiums which many oil bulls have started to talk about soon after the attacks now look increasingly unlikely to hold. The spike in US repo rates which also had many concerned about it signalling something more ominous look increasingly more of a technical plumbing issue that Fed seems to be now on top of with its open-market operations prepared for more cash injections over the next few weeks.

Markets increasingly insensitive to negative news on trade
The reported decision by Chinese trade officials to cancel their planned visits to US farmlands is more of a concern, however, as a comprehensive trade deal still looks far away from being resolved. Moreover, Mr Trump denounced rumours of any possibility of reaching a partial deal that could postpone higher tariffs further into the future, despite making more concessions at the end of the week in temporarily exempting more Chinese goods from its existing import duties. Come what may, we think the market has grown increasingly insensitive to negative news on trade issues, especially as demand in technology segments look to be showing strong signs of bottoming out while both US and Chinese consumption have remained relatively robust despite weak manufacturing activity.

BOJ’s lack of action underlines its easy policy exhaustion
BOJ’s board meeting proved even less uneventful. As we have vigorously argued, the idea that BOJ will raise the volume of its QE program is nothing short of a hoax as its JGB purchases have already fallen notably short of its Y80trn target in the past few years, simply because there has not been enough bonds to buy and it has forced lenders into more riskier assets like CLOs that both it and MOF have been warnings lenders about. In fact we can safely argue now that BOJ’s QE policy has failed miserably in its attempt to raise inflationary expectations and have unnecessarily handicapped Japan’s financial firms.

Further cuts in BOJ’s JGB purchases shows its hand
BOJ’s muted way of spelling out a more desired steepening of the curve was reflected again in the central bank’s QE operations unveiled the next day, once again cutting its purchases of longer dated papers, this time across the curve from 5yr to 25yr durations. After months of increasing pressure from banks, insurers, pension funds and saving associations not to lower rates any further, it looks like the BOJ chief, Kuroda is finally starting to listen as the latest Japan inflation rates of 0.5% leaves the bank’s inflation target of 2% now look even more out of touch with the realms of reality. We continue to expect banks and insurers to further outperform as this regime change become more evident.