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.
“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.”