BOJ Refrains from Meeting Market Expectations – MUFG
Derek Halpenny, European Head of GMR at MUFG, suggests that it is no
surprise that USD/JPY is down over 2.5% today after the BOJ decided
against implementing further monetary easing measures despite very high
speculation of action being taken.
Key Quotes
“That
of course was fuelled by the Bloomberg News story last Friday that the
BOJ would cut the interest rate on reserves again and also cut the rate
to negative on the BOJ Support for Lending program (the BOJ did not even
discuss this option today according to Kuroda). USD/JPY fell from
109.40 to 111.80.
The reversal to today’s level is probably
about where it would be were it not for that Bloomberg News story given
the dollar generally has weakened this week. The drop today in USD/JPY
and the drift higher in EUR/USD has resulted in the DXY index falling
below the closing lows set this month to the lowest level since last
August.
Speculation had also been very high given today the BOJ
also released its quarterly Outlook for Economic Activity and Prices.
Today’s report revealed cuts to both real GDP growth and inflation
forecasts. Annual core CPI was cut from 0.1% to 0.0% for the year just
completed while the forecast for this year was cut from 0.8% to 0.5%,
while next year the forecast was cut from 1.8% to 1.7%. It is that much
more modest cut to next year’s forecast that no doubt will be used by
Governor Kuroda to argue that no additional easing was required at this
stage. However, they have watered down the description of the timing of
reaching the inflation goal from the first half of fiscal year 2017 to
“during” fiscal year 2017.
Governor Kuroda is speaking now
arguing that it was “appropriate” at this stage to assess the impact of
the negative rate policy implemented in January. He has also stressed
that there are no limits to monetary policy and further action will be
taken if required. However, the problem is that the high expectations of
action today that were building prior to the Bloomberg News story is an
indication that weakening growth and falling inflation expectations
justified action today.
The fear of the BOJ falling further
behind the curve will only reinforce a tightening of financial market
conditions and raise fears further that the policy impetus behind
“Abenomics” is fading. USD/JPY is set to remain under downward pressure
over the near-term.”