The Federal Reserve is gradually raising rates and allowing the balance sheet to shrink by not fully reinvesting the maturing proceeds. The ECB will purchase half as many bonds in the first nine months of 2018 as it did in the last nine months of 2017. While some observers are talking about a rate hike late this year, it seems highly unlikely. The ECB has been clear that the first-rate hike will not take place until “well past” the end of the asset purchases.  

The Bank of Japan Governor Kuroda has been urging patience with its extraordinary monetary policy. Prime Minister Abe has, already this year, urged the BOJ to continue to support the economy through its policies. The BOJ continues to formally target purchases of JPY80 trillion of JGBs.  

However, leaving aside the declaratory policy, operationally, the BOJ has changed tactics.In addition to its Quantitative and Qualitative Easing (QQE), in late 2016, the BOJ introduced a target for the 10-year bond yield (+/- 10 bp around zero). This has been dubbed “yield curve control (YCC) because the BOJ has set a negative 10 bp deposit rate, and has a 10-year target.  

Investors realized that the targeting the 10-year yield required buying few Japanese government bonds that the pure QQE. The BOJ, though, has not changed its formal target. On the other hand, the BOJ continues to buy other assets, including equity ETFs, J-REITS, and loans. In practice, this is what it means:In the 2016 calendar year, the BOJ’s balance sheet expanded by nearly JPY93.5 trillion.In 2017, it expanded by JPY44.9 trillion.  

Moreover, without much fanfare, the BOJ reported that its balance sheet fell in December. The BOJ’s balance sheet fell by JPY444 bln (~$4 bln) to JPY521.4 trillion (~95% of GDP). Earlier today, the BOJ bought JPY10 bln fewer JGBs of 10-25-year maturities than it did last time (JPY190 bln vs JPY200 bln) and bought JPY10 bln fewer JGBS maturing in more than 25 years (JPY80 bln vs JPY90 bln previously). Japanese yields rose and the yen strengthened as investors and reporters suddenly see tapering.