What does today's BOJ decision really mean for the markets?

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 18, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - The Bank of Japan today kept its base money target under its massive stimulus program unchanged. However, it decided to expand the range of assets it purchases. The policy target of increasing base money at an annual pace of 80 trillion yen ($655 billion) was not changed. A small tweak was however introduced.

    The Bank of Japan in a surprise move decided to increase purchases of exchange-traded funds (ETFs). The central bank will purchase ETFs at an annual pace of 300 billion yen ($2.45 billion) and the ETFs will constitute stocks issued by firms which invest in physical and human capital. The new ETF purchase program will begin in April and is in addition to the current ETF purchase program of around 3 trillion yen annually.

    BOJ’s statement clarified that the objective of the program is aimed at offsetting the impact of its sales of stock which it has purchased from financial institutions since 2002. The BOJ now plans to take 10 years to sell those shares at a pace of around 300 billion yen annually. The move is an attempt to encourage firms to spend more on wages and investment.

    The BOJ in its statement said, "There are many companies that are actively spending on capital expenditure and human resources. We hope such moves broaden further. From this standpoint, the new measures are aimed at supplementing QQE.”

    Given that its existent massive purchases have to led to a sharp decline in the availability of liquidity in the bond (JGB) market, the central bank decided to lengthen the maturity of bonds it purchases. The average maturity of its JGB purchases will be changed to 7-12 years in 2016 from around 7-10 years at the end of this year.

    The BOJ has however, once again held its rates steady at the meeting today. As expected it decoded to stick to the plan of increasing the monetary base by 80 trillion yen a year.

    How has the market interpreted BOJ's decision?

    There was a quite a stir in market immediately after the BOJ statement was released but it was soon realised that there was really not much to be excited about. Capital Economics' Thieliant said that the measures were announced were helpful but "won't make much difference in practice". He observed that the 300 billion yen in additional ETF purchases is "minuscule." Markets did not view the BOJ's steps as a major move. The easing measures decided upon today is not half as aggressive as the steps announced by the BOJ on Oct. 31, 2014, when the central bank had decided to expand its annual purchase of Japanese government bonds to ¥80 trillion from ¥50 trillion earlier.

    ANZ also said that today’s decision implied a mild easing. According to ANZ, the BOJ only tweaked things a bit. “The BOJ likely took the opportunity with the 2016 buying plan to tweak things slightly”, it mentioned in a note. "At the margin, today's decision represents a very mild easing of policy," ANZ said in a note Friday. Although the BOJ did not alter the size of its asset purchase program, these slight tweaks (duration extension and extra ETFs) at the margin could be considered to be slightly stimulatory."

    Markets have raised doubts whether today’s announcement will have a significant impact on the economy and the equity market. Steven Leung, head of institutional sales at UOB Kay Hian is of the opinion that the ETF purchase “is mostly aimed at boosting sentiment.”

    Immediately after the decision, the Nikkei retraced early losses and jumped more than 2 per cent. It however quickly turned negative. The benchmark soon turned into negative territory, declining 1.2 per cent to touch 19115.17. The dollar rose against the yen registering a gain of 123.58 yen, compared with around 122.40 yen before the decision. The pair however soon retraced gains. The dollar was noted to be fetching 122.17 yen around 0437 GMT.

    No change in policy can be expected in January 2016

    The BOJ sounded more upbeat about the economy. Its perception has probably been formed by the revision of the initial Q3 GDP data which showed third quarter rose at a 1 per cent annualized rate, as against 0.8 per cent contraction initially recorded. The BOJ stressed in today’s statement "Companies and households are shifting away from their deflationary mindset under our quantitative and qualitative easing (QQE) program.”

    The rise in machinery orders recently reported as well as industrial production figures for October implies that economic activity has been recovering in the fourth quarter. Underlying inflation has been holding up, though it continues to stay below 2 per cent inflation target. The statement thus gave an impression that the central bank believes that no pressing need to further alter policy stance. Policy makers can thus be expected to keep monetary policy unchanged in January.
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