BoJ: A Different Kind of Surprise - ING
James Smith, Economist at ING, suggests that the BoJ took markets by
surprise by holding back on adding stimulus at their April meeting,
disappointing many who had expected further action.
“The Bank of Japan’s ability to take markets by surprise was demonstrated once again, albeit in a slightly different way to January’s move to negative interest rates. With the outlook for the economy and prices becoming more and more uncertain, mainly as a result of recent JPY strength, many (ourselves included) had expected the Bank of Japan to expand stimulus at this meeting.
As we noted before the meeting, the BoJ’s ability to both take markets positively by surprise by meaningfully expanding stimulus was fairly limited. We feel that the BoJ’s decision reflects a desire to let the dust settle on negative rates and see how the domestic and global economy evolves over the next few weeks and months.
Whilst the market reaction was large, we feel that this reflects a disappointment on what were in the end, probably slightly unrealistic easing expectations, as the market appeared to have positioned itself for fairly bold action. That said, much of the correction in JPY back below 109 is probably due to the fact that markets had priced a move to negative rates on the Loan Support Programme, in reaction to the apparent leak last Friday. Without the leak, the market reaction to this decision may have been more muted.
In the months ahead, the challenges facing policymakers (both Fiscal and Monetary) are unlikely to dissipate. In the face of global headwinds and a stronger JPY, we feel that the Bank of Japan will ultimately have to ease policy again. The most obvious timing would be their July meeting, when the next Outlook report is released. However, given the limited tools available, the BoJ may want to save its tools until later this year or next to help stimulate the economy around the time of the planned April 2017 consumption tax hike (assuming this goes ahead as planned).”