The BOJ Reaches Its Limits

23 Dec 2015 | Author: | No comments yet »

Dollar falls against yen after Japan stops short of extra QE.

The U.S. dollar tumbled against the Japanese yen on Friday after the Bank of Japan merely tweaked its monthly asset-purchase program, suggesting to traders that the central bank may not ease policy as much as expected. 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.

The BoJ set up a program to buy exchange-traded funds, extend the maturity of bonds it owns to around 12 years and increase purchases of risky assets. 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.

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. Dealers had held on to the dollar in the wake of the Fed’s long-awaited decision on Wednesday to raise interest rates for the first time in nearly a decade, as the US central bank signaled confidence in the health of the world’s top economy. 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). While consumer price gains are far from the 2 percent target, Kuroda said the inflation trend is improving and the economy is gradually recovering. “This all simply highlights the fact that it’s not easy to push on a string,” Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo, who previously worked at the BOJ, said of the fine-tuning unveiled Friday. “Some thought that they won’t ease any more because of a lack of tools.

However, the BOJ did make some changes to monetary policy, announcing that it would purchase 300 billion yen of ETFs annually, as well as extend the average duration of Japanese government bond purchases to 7-12 years, up from 7-10 years, commencing in 2016. The BOJ is trying to keep a low profile on the move, which BOJ Governor Haruhiko Kuroda described as “tinkering.” On Wednesday, the Federal Reserve raised interest rates by 0.25%, the first upward move since June 2006. 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 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. To the credit of Fed Chief Janet Yellen and her colleagues, the Fed put into place a carefully crafted strategy, sending a steady stream of signals that it was intending to tighten monetary policy, if economic conditions remained positive.

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. 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. 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.

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. 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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