Bank of Japan lending program boost lifts sentiment

Enhanced Covid-19 response

In line with market expectations, the BoJ left interest rates unchanged in an 8-1 vote at the June meeting which concluded June 16. Yield curve control (YCC) where the BoJ targets the 10-year Japanese government bonds (JGBs) yields at around zero percent is also kept unchanged. The BoJ will also continue to purchase a necessary amount of JGBs without setting an upper limit as updated in an earlier meeting. This comes amid a situation which the BoJ and Governor Kuroda in his post-meeting speech had emphasized as “extremely severe”.

The notable item had been the increase in estimation of the overall virus package to 110 trillion, up from the 75 trillion that had been projected earlier. This follows the latest 1.1 trillion package that had passed through parliament last week to continue shoring up a coordinated fiscal and monetary policy response towards the Covid-19 hit to the Japanese economy. As reported by Reuters, this revision comes about by design reflecting the increased sum of support should more loans be taken out by corporates. BoJ governor Kuroda in his conference had also highlighted the expansion being an increase in the number of participants.

Even though the BoJ had reiterated their support and expressed that they will not hesitate to take additional easing measures if necessary, as suggested from our preview, the BoJ is now expected to be in wait-and-see mode following the massive amount of supported issued. This may be the last significant change we will be seeing for some time barring a deepened shock from a second Covid-19 wave.

Nikkei 225 uptrend kept intact

As told, the market reaction had leaned on the positive end. Over and above the latest Fed update on the expansion of the scope for corporate bond buying that boosted Asia markets, the BoJ’s update had created an additional lift for sentiment that drove the Nikkei 225 index past 4.0% gains post meeting. News of the Trump administration preparing a near $1 trillion infrastructure had also been one to support prices, though this had likely been long in the expectation for markets.

On FX, USD/JPY (大口） had seen mild reactions though the Japanese yen broadly lost ground against G10 and Asian peers post meeting. This was seen further aiding in the Nikkei 225 climb. The broad situation however remains one of high uncertainties, one shared by the BoJ, that could continue to see to price adjustments in the equity space, particularly watching for any deviation from the uptrend on hand.