Tue 26 Dec 2017


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  • Today at the stock market Opinion
  • The portfolio today Opinion
  • News
  • flag_japan Japan Update
  • flag_china China Update
  • Today at the stock market

    bull/bearU.S. stocks declined on Tuesday as Apple and shares of its parts suppliers weakened on a report of soft iPhone X demand, which pulled technology shares lower. Most markets around the world, including parts of Europe and Asia, were shut on Tuesday.

    • The S&P 500 index fell 2.84 points, or 0.11%, to 2,680.50
    • The Dow Jones Industrial Average fell 7.85 points, or 0.03%, to 24,746.21,/li>
    • The Nasdaq Composite index fell 23.71 points, or 0.34%, to 6,936.25.
    • Advancing issues outnumbered declining ones on the NYSE by a 1.30-to-1 ratio; on Nasdaq, a 1.14-to-1 ratio favored decliners.
    • The S&P 500 posted 39 new 52-week highs and two new lows; the Nasdaq Composite recorded 88 new highs and 26 new lows.
    • Volume on U.S. exchanges was 4.03 billion shares, the lowest volume of the year for a full session, compared to the 6.9 billion average for the full session over the last 20 trading days.

    Apple

    According to Taiwan’s Economic Daily, citing unidentified sources, Apple will slash its sales forecast for its flagship phone in the current quarter to 30 million units, down from what it said was an initial plan of 50 million units.

    The report, along with some recent brokerage calls on tepid iPhone X demand, made Apple shares sink 2.5%, their worst single-day percentage fall since 10 Aug 2017.

    “There is news in Apple today so it is causing some kind of angst in certainly Apple, maybe some Apple suppliers and maybe some tech in general,” said Ken Polcari, Director of the NYSE floor division at O’Neil Securities in New York.

    “The whole Apple thing is giving people an excuse to take some money out of tech because it has been such a great performer.”

    Shares of companies that supply parts to Apple, including Broadcom, Skyworks Solutions, Finisar and Lumentum Holdings, all fell. The PHLX semiconductor index lost 0.97%.

    Technology

    The S&P technology index fell 0.70%, the worst performer among the 11 major S&P 500 sectors. The index has come under pressure in recent days and suffered its 5th straight decline as market participants see tech names getting a smaller boost from last week’s U.S. tax overhaul.

    Despite the declines, the tech sector is still up nearly 40% for the year.

    Energy

    Losses were curbed by a boost in energy stocks as oil prices jumped more than 2%, helped by an explosion on a crude pipeline in Libya and voluntary OPEC-led supply cuts.

    Chevron rose 0.8% and EOG Resources gained 2.1% to lead the S&P energy sector 0.82% higher.

    Retail

    Shares of department store operators Kohl’s, JC Penney (JCP.N) and Macy’s got a boost after a report that retail sales in the holiday period rose at their strongest pace since 2011. The S&P retail index advanced 0.63%.Reuters

    Market indices

    Market indices
    ^ Market indices today (mouseover for 12 month view) Chart: Google Finance

    Index Ticker Today Change 31 Dec 16 YTD
    S&P 500 SPX (INX) 2,680.50 -0.11% 2,238.83 +19.72%
    DJIA INDU 24,746.21 -0.04% 19,762.60 +25.21%
    NASDAQ IXIC 6,936.25 -0.35% 5,383.12 +28.85%

    Portfolio Indices

    USD and AUD denominated indices over the past 52 weeks (Chart: Bunting)
    ^ USD and AUD denominated indices over the past 52 weeks Chart: Bunting

    Index values

    Index Currency Today Change 31 Dec 16 YTD
    USD-denominated Index USD 3.089 -1.65% 2.105 +46.78%
    Valuation Rate USD/AUD 0.77781 +0.12% 0.72663 +7.04%
    AUD-denominated Index AUD 3.974 -1.77% 2.895 +37.26%

    Portfolio stock prices

    Stock Ticker Today Change 31 Dec 16 YTD
    Alphabet A GOOGL $1065.85 -0.29% $792.45 +34.50%
    Alphabet C GOOG $1056.74 -0.32% $771.82 +36.91%
    Apple AAPL $170.57 -2.54% $115.82 +47.27%
    Amazon AMZN $1176.76 +0.71% $749.87 +56.92%
    Ebay EBAY $37.94 +0.47% $29.69 +27.78%
    Facebook FB $175.99 -0.69% $115.05 +52.96%
    PayPal PYPL $74.27 +0.51% $39.47 +88.16%
    Twitter TWTR $24.26 -0.82% $16.30 +48.83%
    Visa V $112.99 +0.26% $78.02 +44.82%
    VMware VMW $127.56 -0.11% $78.73 +62.02%

    FX: USD/AUD

    USD

    DXY movements
    ^ Bloomberg Dollar Spot Index (DXY) movements today (mouseover for 12 month view) Chart: Bloomberg

    The Bloomberg Dollar Spot Index (DXY) was little changed.
    The EUR was little changed at USD 1.1864.
    Britain’s GBP rose less than 0.1% to USD 1.3379.
    Bloomberg

    AUD

    AUD movements
    ^ AUD movements against the USD today (mouseover for 12 month view) Chart: xe.com

    Oil and Gas Futures

    Before the Libyan Explosion

    Oil edged lower towards $65/barrel on Tuesday, but remained within sight of its highest level since mid-2015, as the looming restart of a key North Sea oil pipeline offset support from OPEC-led supply cuts.

    The North Sea Forties pipeline, which plays an important role in the global oil market, is being tested following repairs and full flows should resume in early January, its operator Ineos said on Monday.

    “The confirmation that Forties is coming back is the main development of the long weekend,” said Olivier Jakob, analyst at Petromatrix. “For sure it has the potential for capping Brent.”

    Trading activity was thin because of the Christmas holiday in many countries. Just 50,000 contracts of front-month Brent crude futures changed hands on Tuesday, well below the typical daily average of more than 250,000 contracts.

    Brent has risen 17% in 2017. The Organization of the Petroleum Exporting Countries, plus Russia and other non-members, have been withholding output since 1 Jan 2017 to get rid of a glut.

    The producers have extended the supply cut agreement to cover all of 2018.

    Iraq’s oil minister said on Monday there would be a balance between supply and demand by the first quarter, leading to a boost in prices. Global oil inventories have decreased to an acceptable level, he added.

    That’s earlier than seen by OPEC’s latest official forecast, which calls for a balanced market by late 2018.

    While the OPEC action has lent support to prices all year, the unplanned shutdown of the Forties pipeline on 11 Dec 2017 pushed Brent to its mid-2015 high.

    Forties plays an important role in the global market as it is the biggest of the five North Sea crude streams underpinning Brent, the benchmark for oil trading in Europe, the Middle East, Africa and Asia.

    Rising production in the United States is offsetting some of the OPEC-led cuts.

    The U.S. rig count, an early indicator of future output, held at 747 in the week to 22 Dec 2017, according to the latest weekly report by Baker Hughes.Reuters

    After the Libyan Explosion

    Oil prices touched two-and-a-half year highs in light volume on Tuesday, boosted by an explosion on a crude pipeline in Libya and voluntary OPEC-led supply cuts.

    Libya has lost around 90,000 bpd of crude oil from a blast on a pipeline feeding Es Sider port, a Libyan oil source said, adding that NOC was still assessing the damage. A Libyan military source said earlier that armed men had planted explosives at the pipeline. The country’s output had been recovering in recent months after being held down for years by conflict and unrest.

    The impending restart of a key North Sea pipeline, Forties, limited the rally. The pipeline is being tested after repairs and full flows should resume in early January, its operator said on Monday.

    “Keep in mind that the field and pipeline are old and it may have issues and it’s probably why the market isn’t selling off,” said Scott Shelton, broker at ICAP in Durham, North Carolina.

    U.S. shipments to China, one of the biggest oil consumers in the world, have benefited from the OPEC-led output cuts. Russia, however, was China’s largest crude oil supplier for the 9th month in a row in Nov 2017, also topping Saudi Arabia for the year so far, Chinese customs data showed on Tuesday.Reuters

    Futures prices

    Prices are as at 15:49 ET

    • NYMEX West Texas Intermediate (WTI): $59.80/barrel +2.27% Chart
    • ICE (London) Brent North Sea Crude: $66.80/barrel +2.38% Chart
    • NYMEX Natural gas futures: $2.64/MMBTU -0.97% Chart

    Apple Suppliers Fall on Weak iPhone X Demand

    Press Report: Reuters

    Shares in several of Apple Inc’s Asian suppliers fell for a second straight day on Tuesday, hurt by a report from Taiwan’s Economic Daily and some analysts saying that iPhone X demand could come in below expectations in the first quarter.

    Apple will slash its sales forecast for the iPhone X in the quarter to 30 million units, the Taiwanese newspaper said on Monday, citing unidentified sources – down from what it said was an initial plan of 50 million units.

    Apple has not publicly disclosed quarterly sales targets for the iPhone X, which went on sale in Nov 2017.

    Some analysts have also flagged disappointing demand. U.S.-based JL Warren Capital is predicting shipments of just 25 million units as consumers baulk at the “high price point and a lack of interesting innovations”.

    Chinese broker Sinolink Securities said it expects the model’s price would dampen consumer enthusiasm for the product, adding that slow production rates could also hinder sales.

    But others were more bullish.

    “Our work continues to suggest the March and June quarters will have a significant amount of iPhone X make-up shipments,” Chicago-based Loop Capital said in a note last week, forecasting shipments of 40-45 million units in the first quarter of 2018, up from an estimated 30-35 million units in the current quarter.

    Analysts at Jefferies have also forecast around 40 million iPhone X sales for the first quarter.

    An Apple spokeswoman said the company does not comment on market rumors. During a trip to China this month Apple CEO Tim Cook said he “couldn’t be happier” with the demand for the iPhone X in the country.

    Apple suppliers that were most hit included Genius Electronic Optical Co Ltd which dropped 2.4% on Tuesday to take its losses this week to 11.4%. Pegatron Corp also fell on both days, losing 3.2% this week.

    But falls for Foxconn, one of Apple’s main suppliers formally known as Hon Hai Precision Industry Co Ltd, were milder and it has lost only 1.8% over the two days.

    A Reuters analysis of Chinese social media shows that interest in the iPhone X – which spiked around its launch – has not kept pace with the highly popular iPhone 6 released in 2014, which helped then drive massive sales for Apple in China.

    There were only 4.97 million Weibo posts mentioning the iPhone X so far in Dec 2017 compared to over 11 million for the iPhone 6 in the equivalent period in 2014, the analysis showed.

    Apple’s stock has risen over 50% in 2017 and is currently valued at just under $900 billion.More

    Google To Establish Bricks and Mortar Stores in India

    Press Report: Reuters

    Alphabet Inc’s Google is looking to launch brick-and-mortar stores in India to boost sales of its Pixel smartphones, the Economic Times newspaper reported on Tuesday, citing three people with knowledge of the matter.

    Google is exploring the idea of physical stores after finding an encouraging response to more than a dozen pop-up stores opened in malls across the country to showcase the second generation Pixel phones, the newspaper reported.

    India is the world’s second biggest wireless market with 1.2 billion mobile subscribers, which is currently dominated by South Korea’s Samsung Electronics Co Ltd, and Chinese players including Xiaomi, Oppo and Vivo.More

    Amazon Prime Trialled by 4 Million

    Press Release

    Amazon celebrated its biggest holiday season with customers all around the world shopping at record levels. Prime membership continued to grow this holiday – in fact, in one week alone, more than four million people started Prime free trials or began paid memberships, to benefit from free two-day, one-day or same-day shipping, in addition to ultra-fast one and two hour delivery with Prime Now.

    Amazon “Amazon Celebrates Biggest Holiday; More Than Four Million People Trialed Prime In One Week Alone This Season“, 26 Dec 2017 More

    flag_usa US: MasterCard Retail Sales Report

    Press Release

    Mastercard SpendingPulse today reports that holiday sales increased 4.9 percent this year, setting a new record for dollars spent. This is the largest year-over-year increase since 2011 and a further indication of consumer confidence. Online shopping also saw large gains of 18.1 percent compared to 2016, boosted by a late season rally.

    The SpendingPulse report details holiday shopping from November 1 through December 24 and covers retail sales across all payment types, including cash and check.

    Key findings of the Mastercard SpendingPulse report include:

    • This was a winning holiday season for retail overall, though the story was different category by category.
    • For many shoppers, there was no place like home this holiday season. Electronics and appliances increased 7.5 percent, the strongest growth of the last 10 years. The home furniture and furnishings category grew 5.1 percent, as did home improvement.
    • Specialty apparel and department stores, which both traditionally see the bulk of sales happen in-store, saw moderate gains. This is particularly impressive given recent store closings.
    • Retailers’ heavy early-season promotions paid off, with the first three weeks of November seeing significant jumps.
    • In addition, shoppers were still spending late into the season, with December 23 next to Black Friday in terms of single-day spending. This was a boon to certain categories, including jewelry. Jewelry grew 5.9 percent, largely driven by last-minute sales.

    “Evolving consumer preferences continue to play out in the aisles and online sites of retailers across the U.S. Overall, this year was a big win for retail. The strong U.S. economy was a contributing factor, but we also have to recognize that retailers who tried new strategies to engage holiday shoppers were the beneficiaries of this sales increase,” said Sarah Quinlan, senior vice president of Market Insights, Mastercard.

    Mastercard, “Mastercard SpendingPulse: Retail Sales Grew 4.9 Percent this Holiday Season“, 26 Dec 2017 More

    flag_japan Japan update

    Household Spending. Nov 2017

    Reuters Article Extract

    Japan’s household spending rose more than expected in Nov 2017 while consumer inflation ticked up and the jobless rate hit a fresh 24-year low, offering the Bank of Japan (BOJ) some hope an economic recovery will drive up inflation to its 2% target.

    But the increase in prices was due mostly to a boost from rising fuel costs that is seen fading in 2018, keeping the BOJ under pressure to maintain its huge monetary support even as other central banks seek an end to crisis-mode policies.

    Spending was driven by broadbased gains, with households loosening the purse strings for items such as refrigerators, washing machines, and sporting goods and services such as eating-out and travel.

    Behind the improvement is a slow but steady rise in household income. Wage earners’ disposable income rose 1.8% in Nov 2017 from Nov 2016, suggesting that higher incomes have encouraged consumers to open their wallets.

    A stock market boom is also giving households more purchasing power. Japan’s top 4 department stores all saw retail sales increase in Nov 2017 from Nov 2016 on brisk demand for luxury items.

    The nationwide core consumer price index (CPI), which includes oil goods but excludes volatile fresh food prices, rose 0.9% in Nov 2017 from Nov 2016, government data showed on Tuesday, marking the 11th straight month of gains. The pace of price growth was just ahead of 0.8% in Oct 2017 and a median market forecast of the same rate.

    Despite the increase seen in wages, Prime Minister Shinzo Abe has urged companies to raise wages by 3% or more next year, keeping pressure on firms to spend their huge cash pile to broaden the benefits of his stimulus policies. A Reuters poll published earlier this month found two-thirds of Japanese firms think the government’s push to raise wages by 3% is a tall order, with some dismissing it out of hand.

    Separate data released on Tuesday showed prospects for a sustained recovery were picking up. The unemployment rate hit a fresh 24-year low of 2.7% in Nov 2017 and job availability rose to a nearly 44-year high.

    Household spending rose 1.7% in Nov 2017 from Nov 2016, far exceeding forecasts for a 0.5% increase.

    The slew of upbeat data may offer relief to BOJ policymakers, who are increasingly worried about the demerits of ultra-easy policy but wary of choking off a budding economic recovery by dialing back stimulus too quickly.

    At the Oct 2017 rate review, several BOJ policymakers voiced concern of taking “extreme steps” just to hit their price goal, countering calls by board newcomer Goushi Kataoka that additional easing measures were necessary.

    Most members felt that maintaining current policy was sufficient, though conceding it may take some time before firms more actively raise prices and wages, the minutes showed.

    “It seems so difficult for many firms to take the first step to raise their prices, that they wait and see what other firms are doing,” BOJ Governor Haruhiko Kuroda said on Tuesday.

    Japan’s GDP grew an annualized 2.5% in Q3/2017 to mark a 7th straight quarter of growth thanks to robust exports and capital expenditure.

    But the inflation rate remains distant from the BOJ’s target, as firms remain wary of scaring away cost-sensitive consumers with price hikes.Reuters

    BOJ Monetary Policy Committee Minutes

    Extracts

    I. Summary of Staff Reports on Economic and Financial Developments

    A. Money Market Operations in the Intermeeting Period

    The Bank, in accordance with the short-term policy interest rate of minus 0.1 percent and the target level of the long-term interest rate, both decided at the previous meeting on September 20 and 21, 2017, had been providing funds through purchases of Japanese government bonds (JGBs) and other measures. In this situation, 10-year JGB yields had been at around 0 percent, and the shape of the JGB yield curve had been consistent with the guideline for market operations.

    B. Recent Developments in Financial Markets

    In the money market, interest rates on both overnight and term instruments had generally been in negative territory. The uncollateralized overnight call rate had been in the range of around minus 0.02 to minus 0.06 percent. As for interest rates on term instruments, yields on three-month treasury discount bills (T-Bills) had been at around minus 0.2 percent recently.
    The Nikkei 225 Stock Average had risen significantly, due in part to expectations of an improvement in corporate profits, in a situation where the yen had been depreciating somewhat against the U.S. dollar. It had been at around 22,000 yen recently, the highest level in 21 years. In the foreign exchange market, the yen had depreciated somewhat against the U.S. dollar, mainly reflecting the widening interest rate differential between Japan and the United States. Meanwhile, it basically was more or less unchanged against the euro.

    C. Overseas Economic and Financial Developments

    Overseas economies continued to grow at a moderate pace on the whole.

    The U.S. economy continued to recover firmly, mainly in household spending, owing to a steady improvement in the employment and income situation. Exports had been on a moderate increasing trend, while business fixed investment also continued to pick up. As for prices, both the year-on-year rate of increase in the personal consumption expenditure (PCE) deflator for all items and that for all items excluding food and energy had been at around 1.5 percent.

    The European economy continued to recover steadily. Exports had been increasing moderately. Private consumption had been on an increasing trend, partly supported by improvements in the labor market and consumer sentiment, while business fixed investment also had been on a moderate increasing trend. With regard to prices, both the year-on-year rate of change in the Harmonized Index of Consumer Prices (HICP) for all items and that for all items excluding energy and unprocessed food had been at around 1.5 percent. Meanwhile, the pace of economic recovery in the United Kingdom had been slowing as the rise in prices had been weighing on private consumption.

    With regard to emerging economies, the Chinese economy continued to see stable growth on the whole, partly due to the effects of authorities’ measures to support economic activity. As for prices, the year-on-year rate of increase in the consumer price index (CPI) had been at around 1.5 percent. Meanwhile, in the NIEs and the ASEAN countries, domestic demand had been resilient, as business and household sentiment had improved, with exports increasing. Economic activity in Russia and Brazil had picked up, mainly on the back of the bottoming out of commodity prices earlier. In India, the economy had been heading toward recovery, albeit with some fluctuations due to the effects of the introduction of the Goods and Services Tax (GST).
    With respect to overseas financial markets, U.S. long-term interest rates had risen, mainly against the backdrop of waning concern over geopolitical risks and solid economic indicators, while European long-term interest rates generally were unchanged, partly due to uncertainties surrounding political situations in Europe. Meanwhile, stock prices had risen in many countries, mainly due to expectations of an improvement in corporate profits as well as waning concern over geopolitical risks, and capital inflows to emerging economies continued.

    D. Economic and Financial Developments in Japan

    1. Economic developments

    Japan’s economy was expanding moderately, with a virtuous cycle from income to spending operating. Exports had been on an increasing trend on the back of the growth in overseas economies. Those to advanced economies continued on their increasing trend; those to emerging economies had picked up, led mainly by electronic parts and intermediate goods to Asia. Exports would likely continue their increasing trend for the time being, as those of IT-related goods and capital goods were likely to be firm, and thereafter were expected to continue their moderate increasing trend, with the growth in overseas economies continuing.

    Public investment had been increasing. It was likely to remain more or less flat at a high level for the time being, due in part to investment in measures for restoration and rebuilding following the Kumamoto Earthquake and a variety of infrastructure enhancements. Thereafter, it was expected to start declining as the positive effects resulting from the set of stimulus measures diminished, and then maintain a relatively high level underpinned by Olympic Games-related construction.
    Business fixed investment had been on a moderate increasing trend with corporate profits improving. According to the September 2017 Tankan (Short-Term Economic Survey of Enterprises in Japan), business fixed investment plans for fiscal 2017, especially those of large enterprises, showed firms’ solid stance. Reflecting this positive stance, machinery orders and construction starts in terms of planned expenses for private and nondwelling construction — both of which were leading indicators of business fixed investment — continued on an increasing trend, albeit with large monthly fluctuations. Business fixed investment was likely to continue increasing moderately for the time being, mainly on the back of an improvement in corporate profits, accommodative financial conditions, and heightened growth expectations. Thereafter, particularly with cyclical adjustments in capital stock becoming evident, downward pressure on such investment was expected to intensify.

    As for the employment and income situation, supply-demand conditions in the labor market continued to tighten steadily and employee income had increased moderately. The active job openings-to-applicants ratio had followed a steady improving trend, and the unemployment rate had declined to the range of 2.5-3.0 percent.

    Private consumption had increased its resilience against the background of steady improvement in the employment and income situation. The consumption activity index (CAI) — calculated by combining various sales and supply-side statistics — had increased, albeit with fluctuations mainly stemming from weather conditions. Private consumption was expected to follow a moderate increasing trend, supported by an increase in employee income and the wealth effects stemming from the rise in stock prices, as well as replacement demand for durable goods.

    Housing investment had been more or less flat.

    Industrial production had been on an increasing trend against the background of increases in demand at home and abroad. It was likely to continue to increase firmly for the time being on the back of the increases in demand at home and abroad. Thereafter, it was projected to continue on a moderate increasing trend with the growth in overseas economies.

    As for prices, the rate of change in the producer price index (PPI) — adjusted for the effects of seasonal changes in electricity rates — had been slightly positive compared with three months earlier, reflecting developments in international commodity prices and foreign exchange rates. The year-on-year rate of change in the CPI for all items less fresh food was in the range of 0.5-1.0 percent, while the rate of change for all items less fresh food and energy remained slightly positive. With regard to the outlook, the year-on-year rate of change in the CPI (all items less fresh food) was likely to continue on an uptrend and increase toward 2 percent, mainly on the back of an improvement in the output gap and a rise in medium- to long-term inflation expectations.

    2. Financial environment

    Financial conditions were highly accommodative.

    Inflation expectations remained in a weakening phase. Real long-term interest rates — calculated as long-term interest rates minus medium- to long-term inflation expectations — had been negative.

    Firms’ funding costs had been hovering at extremely low levels. With regard to credit supply, financial institutions’ lending attitudes — as perceived by firms — had been highly accommodative. Issuing conditions for CP and corporate bonds had been favorable. Firms’ credit demand continued to increase, such as for funds related to mergers and acquisitions, as well as for those for business fixed investment. Against this backdrop, the year-on-year rate of increase in the amount outstanding of bank lending had been at around 3 percent. The year-on-year rate of increase in the amount outstanding of CP and corporate bonds had been at a relatively high level. Firms’ financial positions had been favorable.

    The monetary base had been increasing at a high year-on-year growth rate of around 15 percent. The year-on-year rate of growth in the money stock had been at around 4 percent.

    II. Summary of Discussions by the Policy Board on Economic and Financial Developments and the October 2017 Outlook for Economic Activity and Prices

    A. Economic Developments

    Regarding global financial markets, members shared the recognition that U.S. and European long-term interest rates had been stable as concern over geopolitical risks had waned compared to a while ago, and that stock prices in major economies — the United States and Germany in particular — had been rising, mainly due to expectations of an improvement in corporate profits and solid economic indicators. While some members saw the recent strong performance of stock prices as providing solid evidence of an economic improvement, they pointed to the need to continue paying close attention to developments in the stock market from various perspectives, including geopolitical risks, as they acknowledged some market participants’ concern about overheating. A few members expressed the view that central banks in the United States and Europe had been proceeding with monetary policy normalization with great care, and that this had been contributing to the recent stability in global financial markets … more …

    III. Summary of Discussions on Monetary Policy for the Immediate Future

    Based on the above assessment of economic and financial developments, members discussed monetary policy for the immediate future.

    With regard to conducting monetary policy, most members shared the recognition that, although it was necessary to carefully examine the fact that firms’ wage- and price-setting stance remained cautious, the momentum toward achieving the 2 percent price stability target was being maintained. As background to this, these members noted the following two points: (1) firms’ stance was likely to gradually shift toward raising wages and prices with the steady improvement in the output gap, and (2) indicators of medium- to long-term inflation expectations had stopped declining, with some indicators showing an uptrend, and such inflation expectations were likely to rise steadily as further price rises came to be observed widely.

    Following this discussion, most members shared the recognition that it was appropriate for the Bank to persistently pursue powerful monetary easing under the current guideline for market operations, and that additional easing measures should not be implemented at this point. One member expressed the opinion that the Bank should continue with the current monetary easing with the aim of persistently encouraging the virtuous cycle of the economy — in which a sustainable increase in demand led to improvement in the income situation — to take hold and completely overcoming deflation. A few members were of the view that the current monetary policy framework incorporated a mechanism in which the effects of accommodative monetary policy would be enhanced through a decline in real interest rates and a rise in the natural rate of interest, with inflation expectations and the potential growth rate rising. These members continued that it therefore was possible to enhance momentum toward achieving 2 percent by maintaining the current guideline for market operations. A different member expressed the view that the current monetary easing policy was the most appropriate policy from the standpoint of providing an environment where firms could work on improving productivity continuously. Another member expressed the view that the level of the current yield curve in real terms was substantially below that of the natural yield curve for all maturities, and was already sufficiently accommodative even compared with past monetary easing phases, and that additional easing measures were therefore unnecessary. A few members said that, if the Bank took extreme monetary easing measures only for the purpose of hastening to achieve the price stability target, side effects such as an accumulation of financial imbalances and an impaired functioning of financial intermediation could arise, consequently preventing monetary accommodation from producing the intended policy effects to a sufficient degree. In response to such views, one member argued that, in a situation where it was likely that excess supply capacity remained in both capital stock and the labor market, and considering that a consumption tax hike was scheduled for 2019, the Bank should implement additional easing measures at this moment, thereby raising the probability of achieving the price stability target earlier.

    Another member said that, although some market participants argued that the Bank should head toward a so-called exit from its current monetary policy along with central banks in the United States and Europe, it would be no wonder if the Bank was late in doing so given that monetary easing in Japan had started later than in those other countries. This member also said that there was no need for concern regarding deterioration in the Bank’s profits in its exit phase. As reasons for this, the member pointed out that, in the process of monetary easing, the Bank’s payment to the national treasury had increased, reflecting a rise in the Bank’s profits, and the government’s tax revenue increased, thereby reducing the ratio of fiscal deficit to nominal GDP. The member continued that in the long run, even after an exit, the Bank’s profits were expected to increase along with the rise in interest rates.

    With respect to yield curve control, members shared the recognition that, since the previous meeting, the JGB yield curve had been formed smoothly in a manner consistent with the guideline for market operations. One member noted that, although market participants’ assessment was that short- and long-term interest rates were very well controlled, in the Bank’s daily conduct of market operations, further attention should be paid not only to liquidity in the JGB market but also to domestic and foreign investors’ attitude toward investment, as well as the securities portfolios held by financial institutions.

    Based on the above discussions, regarding the guideline for market operations for the intermeeting period, most members expressed the view that it was appropriate for the Bank to maintain the following guideline. First, as for the short-term policy interest rate, it would apply a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank. Second, as for the long-term interest rate, the Bank would purchase JGBs so that 10-year JGB yields would remain at around 0 percent. With regard to the amount of JGBs to be purchased, it would conduct purchases at more or less the current pace — an annual pace of increase in the amount outstanding of its JGB holdings of about 80 trillion yen — aiming to achieve the target level of the long-term interest rate specified by the guideline.

    On this point, one member expressed the opinion that, with a view to lowering interest rates with longer maturities, it was appropriate for the Bank to purchase JGBs so that 15-year JGB yields would remain at less than 0.2 percent instead of targeting 10-year JGB yields.

    In response to this member’s opinion, some members pointed out that the specific policy effects on Japan’s economy and prices, as well as the mechanism to bring about such effects, were unclear when the Bank lowered 15-year JGB yields. On this point, a different member expressed concern that a lowering of yields on JGBs with super-long maturities, such as 15-year JGBs, would negatively affect public sentiment, mainly through the fall in the rates of return on investments by insurance companies and pension funds.

    With regard to asset purchases other than JGB purchases, members shared the recognition that it was appropriate for the Bank to implement the following guideline for the intermeeting period. First, it would purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding would increase at annual paces of about 6 trillion yen and about 90 billion yen, respectively. Second, as for CP and corporate bonds, it would maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen, respectively. One member said that, while some market participants were speculating that the Bank would accelerate the pace of ETF purchases toward the year-end in order to achieve the target for the annual pace of increase in the amount outstanding of ETF holdings, such a view was not appropriate. This member noted that the Bank had been purchasing ETFs with a view to influencing risk premia in the stock market. The member added that the actual amount of such purchases varied depending on market conditions, and the Bank had not set a specific time by which to achieve the target for the amount outstanding of ETF holdings. A different member said that the policy effects and the possible side effects of the purchases of risky assets including ETFs should be examined from every angle, even if market functioning was not significantly affected by such purchases at this point.

    With respect to the Bank’s thinking behind its future conduct of monetary policy, most members shared the view that the Bank would (1) continue with QQE with Yield Curve Control, aiming to achieve the price stability target of 2 percent, as long as it was necessary for maintaining that target in a stable manner, (2) continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeded 2 percent and stayed above the target in a stable manner, and (3) make policy adjustments as appropriate, taking account of developments in economic activity and prices as well as financial conditions, with a view to maintaining the momentum toward achieving the price stability target.

    In response to this, one member said that, with a view to reinforcing the inflation-overshooting commitment, it was appropriate for the Bank to introduce a new commitment that it would take additional easing measures if — with regard to the median of the Policy Board members’ forecasts of the CPI in the Outlook Report — there was a delay in the timing of achieving the price stability target due to domestic factors. On this point, a different member expressed the opinion that it was unnecessary for the Bank to make a new commitment as it already had in place the commitment that it would make policy adjustments as appropriate, taking account of developments in economic activity and prices as well as financial conditions, with a view to maintaining the momentum toward achieving the price stability target.

    IV. Remarks by Government Representatives

    … more …

    V.Votes

    A. Vote on the Guideline for Market Operations

    Based on the above discussions, to reflect the majority view of the members, the chairman formulated the following proposal and put it to a vote.

    The Policy Board decided the proposal by a majority vote.

    The Chairman’s Policy Proposal on the Guideline for Market Operations:

    The guideline for market operations for the intermeeting period will be as follows.

    1. The Bank will apply a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank.
    2. The Bank will purchase JGBs so that 10-year JGB yields will remain at around zero percent. With regard to the amount of JGBs to be purchased, the Bank will conduct purchases at more or less the current pace — an annual pace of increase in the amount outstanding of its JGB holdings of about 80 trillion yen — aiming to achieve the target level of the long-term interest rate specified by the guideline.

    … more …

    B. Vote on the Guideline for Asset Purchases

    To reflect the view of the members, the chairman formulated the following proposal to implement the guideline for asset purchases for the intermeeting period and put it to a vote: (1) to purchase ETFs and J-REITs so that their amounts outstanding would increase at annual paces of about 6 trillion yen and about 90 billion yen, respectively, and (2) to maintain the amounts outstanding of CP and corporate bonds at about 2.2 trillion yen and about 3.2 trillion yen, respectively.

    C. Vote on the Statement on Monetary Policy

    On the basis of the above results of votes, members discussed the Statement on Monetary Policy. With a view to reinforcing the inflation-overshooting commitment, Mr. G. Kataoka expressed the opinion that, if there was a delay in the timing of achieving the price stability target due to domestic factors, the Bank should take additional easing measures, and that it was necessary to include that in the policy statement. … more …

    Statement on Monetary Policy

    At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided upon the following.

    (1) Yield curve control

    The Bank decided, by an 8-1 majority vote, to set the following guideline for market operations for the intermeeting period.

    The short-term policy interest rate:

    • The Bank will apply a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank.

    The long-term interest rate:

    • The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain at around zero percent. With regard to the amount of JGBs to be purchased, the Bank will conduct purchases at more or less the current pace — an annual pace of increase in the amount outstanding of its JGB holdings of about 80 trillion yen — aiming to achieve the target level of the long-term interest rate specified by the guideline.

    (2) Guidelines for asset purchases

    With regard to asset purchases other than JGB purchases, the Bank decided, by a unanimous vote, to set the following guidelines.

    a) The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 6 trillion yen and about 90 billion yen, respectively.
    b) As for CP and corporate bonds, the Bank will maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen, respectively.

    Bank of Japan, “Minutes of the Monetary Policy Meeting on October 30 and 31, 2017“, 26 Dec 2017 Minutes

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