Yen Advances as BOJ Signals Resistance to more Aggressive Easing

23 Dec 2015 | Author: | No comments yet »

BOJ fine-tunes stimulus scheme to promote corporate spending.

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. As widely expected, the BOJ kept intact its policy target of increasing or cash and deposits in circulation by 80 trillion yen (£442.88 billion) and the pace at which it buys government bonds and trust funds investing in stocks and property. 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. BOJ Governor Haruhiko Kuroda said the fine-tuning will allow the bank to sustain or even expand stimulus more easily, dismissing the views of some investors that it was taken to avoid bolder steps as its bond buying was drying up market liquidity. 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. But Tokyo stock prices sank as markets saw the new steps as a return to the incremental policy style Kuroda said he had abandoned when launching his stimulus program – dubbed “quantitative and qualitative easing” (QQE) – in 2013. “The BOJ had never imagined that it would need to continue with QQE for this long,” said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley. “Today’s step marks a shift from shock therapy to a long drawn-out struggle in its efforts to achieve 2 per cent inflation,” she said. We wanted to do whatever we can to support this drive.” Friday’s moves underscore the BOJ’s resolve to aid Abe’s efforts to pressure companies into diverting more of their record profits to wage hikes and new investment, which are crucial to sustainably pull the economy out of 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 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. It also said it would sell from April next year shares it had bought from financial institutions, giving it the power to buy shares of firms that meet its wage and investment standards.

However, the new policy emphasis underscores the BOJ’s concerns over how long it could keep buying assets at the current rate, having already gobbled up 30 per cent of JGBs on issue. 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. Kuroda attempted to keep alive market expectations of further monetary easing, stressing his resolve to take “bold action” if needed to achieve its price target.

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. But even Friday’s modest measures found three dissenters on the BOJ’s nine-member board, suggesting that Kuroda may struggle to win enough votes if he were to propose expanding stimulus, some analysts say. “This is the type of incremental move that Kuroda previously said he opposes,” said Hiroshi Shiraishi, senior economist at BNP Paribas Securities. “It suggests that the BOJ has reached the limit of its current quantitative easing and that it cannot expand easing by a large amount.”

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. The BOJ said it will buy ETFs tracking the JPX-Nikkei Index 400, a gauge championed by the Abe administration that selects companies based mainly on performance of return on equity and operating profits. 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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