JAPAN SURPRISE: Japan’s central bank ended a policy meeting Friday by announcing it will expand purchases of exchange traded funds from financial institutions to help inject more cash into the world’s third-largest economy and pursue its 2 percent inflation target.
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The central bank also maintained its base money target at ¥80 trillion and the pace of purchases for other assets including Japanese government bonds. Prime Minister Shinzo Abe said Wednesday he plans to unveil a ¥28 trillion fiscal stimulus plan on August 2.
The BOJ disappointed market hopes on Friday that it might increase its heavy buying of government debt or lower already negative interest rates, cementing the view that it is running out of options within its existing policy framework to lift prices and end two decades of deflationary pressure.
The data comes hours before the Bank of Japan concludes a closely watched two-day rate review ending on Friday, with near-consensus in markets that it will deploy additional stimulus to match the government’s planned big spending package.
The BoJ (Bank of Japan) gave its economic outlook after the monetary policy meeting on July 29, 2016. The BOJ also kept negative interest rates unchanged at minus 0.1 percent.
The BoJ said it would double the size of its dollar lending programme to support growth in US dollars (the Special Rules for the US Dollar Lending Arrangement to Enhance the Fund-Provisioning Measure to Support Strengthening the Foundations for Economic Growth Conducted through the Loan Support Programme) to $24 billion (about 2.5 trillion yen) from the previous size of $12 billion.
Japan’s Nikkei, which swung between gains and losses after the announcement, recovered to trade up 0.6 per cent.
“The BOJ may have disappointed, but other central banks remain poised to ease, so we expect macro investors will also be looking to buy the dip in European and United States fixed income”, Mizuho International’s head of European rates strategy, Peter Chatwell, said.
In a statement, the central bank said the recent Brexit vote in the United Kingdom, a slowdown in emerging economies and volatile markets were its reasons for action.
Heng Koon How, a senior FX investment strategist for Credit Suisse, said the bank clearly upset by only expanding its ETF purchases and keeping policy rate and annual pace of monetary base increase unchanged.
“ETF buying has a direct positive impact on the stock market, but its decision to hold off bond buying hit the dollar-yen”. But we counsel caution: “to us, today’s decision suggests that the BOJ has reached the limits of its current policy framework”.
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The Japanese central bank voted 7-2 to stick with its minus 0.1 per cent benchmark rate. We’re watching Treasury yields continue to drift lower even as we write and are reminded (via the overnight data) that Japanese inflation is running at -0.4% YoY with core-CPI at just +0.4% YoY.
