Forex News – Bank of Japan keeps loose stance; signals it may do more
February 18, 2014 2:51 pm
The Bank of Japan’s regular monetary policy meeting contained few surprises as the bank retained its pace of asset purchases at around 60-70 trillion yen a year (589-687 billion dollars) or 6-8 trillion yen a month.
What the Bank did decide was an increase in a bank lending facility to 7 trillion yen – roughly doubling it. It also extended existing loan facilities that were expiring in June by one year so as to convince banks to make additional loans to the real economy with low interest rates.
Although these changes were modest, the increase in the bank lending facility could have been interpreted as a signal that the Bank was perhaps ready to do more in the future. In addition, Governor Kuroda during his press conference said that policy would be adjusted in the case of downside risks.
The Bank stuck to its optimistic forecast of the Japanese economy and reiterated its confidence that the 2% inflation target would be met during 2015.
A number of economists believe that the coming economic slowdown following the April sales tax increase from 5% to 8%, will eventually force the Bank of Japan to increase the pace of its asset purchases during the second half of the year. It should be noted at the same time that Japan’s quantitative easing program is currently the largest in the world in terms of annual amount as percentage of GDP.
A crucial question surrounding Abenomics or the economic policies of Japan’s new Prime Minister, is whether structural reforms, or the “third arrow” of his policies will take place on a big enough scale so as to be effective. Another key question is whether companies will raise wages in order to support consumption.
Following the previous day’s release of much weaker-than-expected fourth quarter GDP data, some traders expected a more direct reaction by the Bank of Japan. When that outcome did not materialize, some traders rushed to buy back the yen. On closer reflection and better analysis of the announcement and the loan facility modifications, the dollar rallied almost 1 entire yen against the Japanese currency, from a low of 101.75 to 102.73. The Nikkei 225, the Japanese stock market average, rallied by more than 3%, indicating a positive reaction and hopes of more stimulus and an even weaker yen going forward.
The Bank of Japan’s regular monetary policy meeting contained few surprises as the bank retained its pace of asset purchases at around 60-70 trillion yen a year (589-687 billion dollars) or 6-8 trillion yen a month.
What the Bank did decide was an increase in a bank lending facility to 7 trillion yen – roughly doubling it. It also extended existing loan facilities that were expiring in June by one year so as to convince banks to make additional loans to the real economy with low interest rates.
Although these changes were modest, the increase in the bank lending facility could have been interpreted as a signal that the Bank was perhaps ready to do more in the future. In addition, Governor Kuroda during his press conference said that policy would be adjusted in the case of downside risks.
The Bank stuck to its optimistic forecast of the Japanese economy and reiterated its confidence that the 2% inflation target would be met during 2015.
A number of economists believe that the coming economic slowdown following the April sales tax increase from 5% to 8%, will eventually force the Bank of Japan to increase the pace of its asset purchases during the second half of the year. It should be noted at the same time that Japan’s quantitative easing program is currently the largest in the world in terms of annual amount as percentage of GDP.
A crucial question surrounding Abenomics or the economic policies of Japan’s new Prime Minister, is whether structural reforms, or the “third arrow” of his policies will take place on a big enough scale so as to be effective. Another key question is whether companies will raise wages in order to support consumption.
Following the previous day’s release of much weaker-than-expected fourth quarter GDP data, some traders expected a more direct reaction by the Bank of Japan. When that outcome did not materialize, some traders rushed to buy back the yen. On closer reflection and better analysis of the announcement and the loan facility modifications, the dollar rallied almost 1 entire yen against the Japanese currency, from a low of 101.75 to 102.73. The Nikkei 225, the Japanese stock market average, rallied by more than 3%, indicating a positive reaction and hopes of more stimulus and an even weaker yen going forward.
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