BoJ Governor Kuroda has surprised markets in Asia today with the announcement of the expansion of the bank’s quantitative easing program to include exchange traded funds.
The bank said it will continue to expand the money base by 80 trillion Yen per annum but in a 6-3 vote the bank said that it will increase the average maturity of the Japanese bonds (JGB’s) it buys from 7-10 years to 7-12 years from the beginning of 2016.
The bank also said it will “purchase exchange-traded funds (ETF’s) and Japan real estate investment trusts (J-Reits) so that their amounts outstanding will increase at annual paces of about 3 trillion yen and about 3.2 trillion yen respectively.”
After consistently telling the market that no further stimulus was needed to get inflation in Japan back to 2% this has come as a shock to traders.
That initially drove the USDJPY rate as high as 123.48 before it pulled back more than 100 points to sit at 122.09 currently. Likewise, the Nikkei was up more than 2% immediately after the announcement but it too has pulled back hard and it is now trading in the red for the day.
It’s hard to know exactly why traders have reversed this initial stock euphoria. Part of it could be that this is in some respects a technical move. That’s because the BoJ is holding the expansion of the money base firm at an 80 trillion yen annual rate.
But, unlike the Fed yesterday, this move looks like a failure in central bank communications policy. That’s the source of the volatility today as traders grapple with what the expanded policy and other measures mean. Traders loathe uncertainty.
Governor Kuroda looks like he has startled markets and reminded stock traders of the Japanese economy’s problems.
Yuichi Kodama, Meiji Life’s chief economist told Reuters that the BoJ has “not changed the base money target, so this is a very incremental easing.”
But Kodama added, “this is the type of incremental move that BoJ Governor Haruhiko Kuroda previously said he opposes. It suggests that the BoJ has reached the limit of its current quantitative easing and that it cannot expand easing by a large amount.”
Which also suggests the BoJ is getting to the end of the line.
As stocks have fallen so has USDJPY which is now sitting at 122.09 0.4% stronger against the US dollar on the day. Market sources Business Insider spoke to said that while Nikkei weakness is pushing the US dollar down ultimately the weakness in stocks which reflects economic weakness should also be bad for the Yen. So the current bout of Yen strength is likely to reverse and USDJPY head higher again.
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