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So the Bank of Japan announced a new, more aggressive inflation target, coupled with unlimited asset purchases, last night.And yet the Nikkei fell and the yen is on a tear.
Well, one, there’s almost certainly a “sell the news” element, as this was seen for miles away.
But in terms of specific, the bank maybe didn’t go as far as it could have.
SocGen currency strategist Kit Juckes explains that the action isn’t aggressive as the headline suggests.
Please Sir, I want more, said Oliver Twist, fed up with a diet of thin gruel. Such is the market’s response to news in Japan. The Bank of Japan announced that from January 2014, it will embark on open-ended bond purchases, buying Y13trn in bonds a month (but only Y2trn a month in JGBs), until such a time as its new 2% inflation target is met. The new programme starts so far away because that is when the current round of bond-buying will have run its course, but the BOJ could have increased the pace of bond-buying immediately, and the 2% inflation target is viewed by some commentators overnight as disappointing because there is no specific timeline attached to it.
So disappointment on three fronts: The inflation target has no fixed time limit, the bond purchases are still skewed to the short end of the curve, and they don’t start soon enough. Japan has consistently failed to achieve 1% inflation and increasing the target to 2% is reminiscent of an overweight currency strategist aiming for a greater weight loss, to make up for past failure to diet. The key is not the target but what is done to achieve it. However, a commitment to buy bonds until the target is reached will lead to substantial bond purchases and will eventually bear fruit, delivering a weaker currency. The relative growth rates of the Fed and ECB’s balance sheets has been a driver of EUR/USD, and the BOJ is likely to be growing its balance sheet faster than other major central banks in the future, if only because hitting the 2% inflation target is going to be very difficult.