Yen Gains, Bond Yields Tumble After BOJ Enhances Asset Purchases

23 Dec 2015 | Author: | No comments yet »

BOJ shocks market with extra easing, Nikkei tumble.

After the BoJ offered markets a surprise move to buy more ETFs and extend the duration of the bonds it buys, the Nikkei 225 became the worst performer in Asia on Friday.

Just two days after the US Federal Reserve raised interest rates, the BoJ board voted by a majority of 6-3 to buy government bonds with longer maturities and buy an extra Y300bn a year in equities tied to the JPX-Nikkei 400 index. The FT’s Robin Harding notes the size of the extra stimulus is modest, but it signals that BoJ governor Haruhiko Kuroda is concerned about the credibility of his programme and wants to spur investment and wage rises. The Bank of Japan said it would buy another ¥300 billion ($2.45 billion) of exchange-traded equity funds, in addition to the ¥3 trillion in ETFs it has purchased annually since late 2014. The extra ammunition announced today will be used to support firms “that are proactively making investment in physical and human capital.” As for bonds, the BoJ is trying to drive down longer-term interest rates as the Fed did with its “Operation Twist” in 2011.

The BoJ also said it will start accepting foreign-currency bonds and housing loans as collateral, making it easier for banks to sell JGBs, and answering concerns it will soon run out of assets to buy. It’s easy to see why the market wasn’t terribly inspired by the announcement, but it’s not clear why the unexpected moves actually caused a sell-off. Still, the steps don’t go nearly as far as the BOJ’s previous move on Oct. 31, 2014, when the central bank expanded its annual purchase of Japanese government bonds to ¥80 trillion from ¥50 trillion earlier. “I doubt that the impact of this new plan will be big on the Japanese economy and equity market,” said Steven Leung, head of institutional sales at UOB Kay Hian. The weakness Friday comes a day after markets rallied to the Federal Reserve’s decision to raise interest rates for the first time in almost a decade, a confidence boost about the health of the world’s biggest economy. Investors appear to be shifting focus back to some of the factors that pressured stocks in recent weeks, such as the effects of the strengthening dollar on commodity prices, like oil. “The implications of further energy price declines are clearly putting the brakes on equities at the moment,” wrote Angus Nicholson, market analyst at brokerage IG, in a note. “A wave of defaults and bankruptcies in the energy sector still looks likely to come, and these concerns are certainly weighing on markets.” The slide in oil refreshes worries that energy firms will have trouble paying their debts, after a rout in the junk-bond market rattled investors in recent days.

Brent LCOG6, +0.32% , the global benchmark, hit $37.06 a barrel on ICE Futures Europe, the lowest level since December 2008, before rebounding to rise 16 cents to $37.22 a barrel. Ultralow interest rates have boosted equity markets in recent years. “It’s a delicate balance” that the Fed faces in the coming months in pacing subsequent interest rate increases, said Andrew Swan, head of Asian equities at BlackRock Inc. Swan said the firm shifted into Asian equities over the past month, expecting investors to move back into riskier assets as worries eased about the first rate increase by the U.S. central bank.

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