Living Large: Bank of Japan Sorts Challenges With Its Epic Size

23 Dec 2015 | Author: | No comments yet »

Bank of Japan Befuddles With Surprise Move.

USD/JPY has posted sharp losses on Friday, as the yen has gained about 100 points on the day. The Japanese central bank jolted markets with a new scheme supporting companies actively investing in the world’s number three economy, stoking a brief surge in the Nikkei benchmark stock index and the dollar.

TOKYO — The Bank of Japan tweaked its lavish stimulus programme on Friday in a well-timed move that spotlights pressures on companies to do more to support growth by raising wages and investing in factories and equipment. With the central bank’s balance sheet surpassing three-quarters the size of the economy, policy makers are having to solve operational challenges to keep its reflation program going. Wrapping up their last meeting of the year, central bank policymakers added a new plan to boost their holdings in firms dedicated to capital investment and hiring. This week, the US central bank raised its key interest rate by a quarter percentage point, signalling confidence in the US recovery at a time when Japan is still struggling to re-ignite growth after years of stagnation.

The greenback traded lower at 121.79 yen late Friday afternoon from 122.56 yen before the declaration in Tokyo, and from 122.60 yen Thursday in New York. “At first it seemed like the BoJ was progressing with easing, but when you look at what’s inside that, it’s nothing much,” Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd, told Bloomberg News. The BoJ said Friday after a scheduled policy meeting that it will expand purchases of shares in exchange-traded funds, for companies that increase hiring and investment, by 300 billion yen ($2.4 billion) from the current 3 trillion yen ($24 billion). Then the news hit the tape: the central bank was going to extend the duration of the bonds it buys and start a new exchange-traded-fund purchase program. Coming so soon after the Fed’s announcement, the BoJ’s policy meeting drew more than the usual amount of speculation over whether more stimulus was planned. So when headlines hit that it was making moves—extending the maturity of its government bond portfolio and introducing a new stock buying program—reaction was ecstatic.

The markets will also be listening closely to remarks from FOMC member Jeffrey Lacker, the first Federal Reserve Bank President to speak publicly after the historic rate hike of 0.25 percent. The key takeaway was that the BOJ’s main initiative, expanding the monetary base through bond purchases, was held at 80 trillion yen a year ($657 billion).

The dollar also jumped against the Japanese yen, to over 123 yen to the dollar, before falling back to 121.70, down from its previous close of 122.58. The previously bought shareholdings were from an effort that started in 2002, a reminder of how long Japan’s central bankers have been in the business of trying to overcome deflation. The Fed dropped a broad hint in its October policy meeting about a rate hike before the end of 2015, and predictably, this led to tremendous speculation in the markets. The yen rose as much as 0.7 percent against the dollar and strengthened versus all 16 major peers while bonds rallied hard to send 10-year yields to the lowest since January. “It was a shock. Rather, its statement described a need for “supplementary measures” to push companies to invest more in “physical and human capital.” Somewhat confusingly, the BOJ argued that companies are already doing so, but that still more encouragement would be “desirable.” On this score the BOJ’s new measures fell utterly flat.

Although the small rate hike has not shaken up the currency markets and is expected to have limited economic impact, the psychological angle of the rate move cannot be overestimated, as the Fed has given the US economy a critical vote of confidence, and has indicated that additional rates are likely over the course of 2016. Lenders typically use government bonds as collateral, but with the BOJ buying so much of them, their supplies are diminishing, even in a country with the world’s largest debt burden. The Fed’s strategy contrasts sharply with the bungled approach of Mario Draghi at the ECB, who hinted that the ECB would take significant easing steps at its December meeting, but failed to deliver as the ECB did little more than extend the current QE program for another six months. It also extended to 10 years the amount of time it will take to sell off stocks it has purchased as part of its asset buying program, to help minimise the impact on share prices. Aoki estimated that with the change in its rules for real estate investment trusts, known as J-REITs, the BOJ will be able to buy 400 billion yen more of them.

In the end, it’s not the sort of extra buying that the market had hoped for, and I don’t rate it highly either.” It wouldn’t be the first time human traders were able to capitalize on the mistakes of computers. When a false report of explosions at the White House instantly wiped more than $136 billion off the value of U.S. stocks in April 2013, analysts blamed the plunge on programs that base trading decisions on news headlines. The Standard & Poor’s 500 Index recovered its losses within three minutes as investors determined the report, from a hacked Twitter account of the Associated Press, was incorrect. “The wording about ‘establishing a new program for purchases of exchange-traded funds’ is extremely misleading,” said Daisaku Ueno, the chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. “As people started to realize that only the details had been tweaked, and the total package was unchanged, the yen weakness rapidly reversed.” Long positions continue to command a solid majority (64%), which is indicative of strong trader bias towards the pair reversing directions and moving higher.

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