Divyang Shah, Senior IFR Strategist
We suspect that in time if there is a need to do more to limit the volatility on JGBs, then the BoJ will be flexible in its plans. By not making an explicit commitment to increasing how much it buys, the BoJ does not want to limit its flexibility should JGBs settle down and the rush into risk assets moves at a more comfortable pace.
The simple truth is that QE has changed the supply-demand dynamics for the JGB market (rush into risk assets) to such an extent that even increased BoJ buying has proved ineffective.
The stronger the rush into domestic risk assets, the more the BoJ should be willing to increase its own JGB purchases by frontloading QE.
The comments from Kuroda are in effect a willingness to up the pace of QE and thus should be seen as positive for both USD/JPY and the Nikkei.
