The Bank of Japan remained on the sidelines today, contrary to what many were expecting. The central bank kept policy unchanged and noted that it will take additional easing in three steps involving quantity, quality, and interest rates in order to reach its inflation target. The markets were expecting to see the Bank of Japan to announce something “big” to stem the yen’s strong rally. Immediately upon the release, the yen rose sharply and is currently up 2.05% across the board.
BoJ Meeting – Key Points
- Interest Rates: Unchanged at -0.10%. Vote was 7 to 2
- QQE target: Unchanged at 80 trillion yen. Vote was 8 to 1
- Inflation forecasts: The BoJ expects inflation to reach 2.0% target within the financial year of 2017. Previously the BoJ expected the inflation target to be reached within the first half of 2017
- The BoJ noted that inflation expectations have weakened
- Japan GDP expected to grow 1.20% in 2016, lower than previous estimates of 1.50%
- Core CPI expected to grow 0.50% in the financial year 2016, compared to 0.80% expectations previously
The Bank of Japan’s policy decision today surprised the markets which were overwhelmingly in favor of strong policy actions. The speculation started to mount after late last week; Bloomberg reported some ‘unnamed officials‘ hinting that the central bank would engage in some kind of easing similar to that of the ECB’s TLTRO schemes. This sent the yen weaker across the board as USDJPY started to build up strongly, briefly trading near 111.8 levels before falling sharply in a matter of minutes, making the BoJ event a perfect set up for a buy the rumor, sell the fact trade.
However, despite the large consensus expecting the BoJ to act today, as we noted in our previous report, some analysts still expected the BoJ to “do nothing” at today’s meeting.
“Meanwhile, taking the opposite end of the view is Barclays, which expects that the BoJ is unlikely to take additional easing steps this week and rather opt for the July meeting. VP of research, Shinichiro Kadota notes that with the BoJ fresh from its negative rate cut in January, the central bank would prefer to wait and assess the impact of the rate cut than opt for more easing measures in April.”
Ahead of the BoJ’s announcement, there was a strong data flow which included the release of Japan’s inflation data as well. Retail sales were down 1.10% while the National Core CPI fell 0.30% along with weaker household spending, all of which added to more anticipation that the BoJ would act today.
Besides the Bank of Japan, the RBNZ held rates steady at its meeting last night including the Federal Reserve, making all three central banks standing pat on policy, but giving clear signals that June will likely to turn out to be an important month for the markets.
USDJPY is trading at 109.35 currently, but the biggest move so far was in the GBPJPY, which is currently down 1.90% at the time of writing. The markets wait for the BoJ’s press conference where Kuroda is likely to elaborate more on the policy decision today.
