Japan just 'offered markets a little appetizer...'

After all the speculation and hype, the Bank of Japan ultimately ended up announcing only a small tweak to its policy on Friday.

The bank said it would increase its exchange-traded fund purchases to an annual pace 6 trillion yen, up from its previous pace of 3.3 trillion yen.

Moreover, it left its Japanese government bond purchases unchanged at an annual rate of 80 trillion yen and held its key interest rate unchanged at -0.1%.

“There’s always tomorrow,” a HSBC team led by Frederic Neumann wrote in a note. “The BOJ today offered markets a little appetizer, but the full menu of easing has been kept in the oven for another day.”

Perhaps the most notable bit from the BOJ’s Friday meeting was that the bank said it will conduct a review of the current policy settings and economic environment for its next meeting in September.

“As this suggests the need and room for further policy action will be reviewed at the next MPM, expectations for easing could linger until then,” argued Barclays’ Kyohei Morita and Yuichiro Nagai in a note.

On the flip side, the HSBC team wrote (emphasis added):

“This may raise hopes for something punchier. But we counsel caution: to us, today’s decision suggests that the BoJ has reached the limits of its current policy framework. A significant increase in JGB purchases is difficult given that the central bank, by its own admission, may run into trouble at some stage obtaining enough bonds to keep the programme going.”

The Japanese yen strengthened against the dollar by as much as 2.9% to 102.26 in the aftermath of the announcement.

The BOJ has been under pressure to pursue even more aggressive measures recently as Japan’s economy continues to slog along. However, there have been questions as to whether the bank could actually do that given its already extremely accommodative posture, and the WSJ had previously reported that some bank officials “are signalling a reluctance to act.”

Still, for the most part, analysts were expecting the bank to do something at Friday’s meeting. A Bloomberg survey conducted from July 15 to 22 found that 32 out of 41 analysts forecast that the BOJ will expand monetary stimulus — the highest percentage of respondents in any poll in over the last three years.

And so, the bank’s surprise decision comes as a bit of let down to Japan watchers.

The bank’s “decision to refrain from meaningful easing once again today has disappointed investors and resulted in a renewed strengthening of the yen. While we still expect the Bank to do more, it seems that Governor Kuroda has now adopted the gradualist approach his predecessors were scorned for,” wrote Capital Economics’ Marcel Thielant after the announcement.

“…the bank’s behaviour over the past year suggests that it has now adopted an incremental approach,” he added. “Investors should prepare for further disappointments.”

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