BOJbondbuyingandRBI'ssupporttoMF's

As the world continues to wage war against the Corona virus the news around the issue remains mixed, with some countries reporting a rise in number of the new cases whereas some other countries discussing the strategy to open albeit partially, not everyone is in the same boat. The monetary response to the crisis will continue to claim limelight as US FED, EU’s ECB and Japan’s BOJ will make important policy decisions this week.

This brings us to the news that BOJ in its latest communication this morning has decided to ramp up the purchase of risky assets and it has pledged to buy unlimited amount of JGB’s to quell the virus effect. BOJ policy is in line with what Fed has done but given the Japanese fight with disinflation has been waging on for last 30 years, BOJ actions are important as well as instructive. Now a bit of history here, Japan happens to be the first major economy to experience a low growth and low inflation phenomenon after a boom period which lasted 30 years. The real estate bubble burst in early 90’s started the downward spiral and an unending series of responses by BOJ to fight disinflation.

As per Economics 101, the state of disinflation produces a set of secondary impacts which take on a life of their own. Disinflation would result in lowering of product prices which in turn would result in lowering of nominal profits of the corporations which are building those products. To save on the bottom line, companies would try to retrench and cut costs. Retrenched employees with their reduced or non-existent income will add to the lack of demand fuelling the vicious cycle. The Japanese solution to break the cycle was to lower the cost of funds by cutting interest rates and then lower the bond yields by buying govt bonds across the curve. The response was finally given the name Abenomics in 2013 when the duo of Abe and Kuroda occupied the post of PM and BOJ Chief respectively.

BOJ, with today’s action, has scrapped the earlier policy of buying 80 trillion worth of JGB’s annually. We will discuss the theoretical underpinning of such actions in a later note.

Later in the week we will have Fed and ECB’s meetings. Fed is expected to stay put and examine the impact of their actions so far, whereas ECB is expected to bring their own version of bond buying. The most straight forward impact of these actions can be seen in the stock markets as company’s earnings get a cushion against the decline.

In India markets will be keenly watching the unfolding of MF saga. RBI has announced a special liquidity facility to the tune of 50000 Cr INR to support the MF sector. Under the scheme RBI will conduct repo operations of 90 days tenor at the fixed repo rate. Funds availed by the banks under the scheme will be required to use exclusively for the liquidity requirements of MFs.

Rupee trades in a positive zone around 76.09. The 10 year benchmark bond yield trades at 6.18. Dollar Index trades a shade below 100 and US 10 year bond yield trades at 0.62. Japanese 10 year bond trades at -0.03. Indian stocks are up close to 2%.