The Bank of Japan is scheduled to make its interest rate statement tomorrow and I've got a feeling we could be in for a surprise. Here are three reasons why the BOJ may hit the markets with more quantitative easing measures tomorrow!
Central Banks Making Moves
Last week, we got a trio of central banks step up to the plate and make moves to inject more liquidity into their respective economies.
The European Central Bank cut rates by 25 basis points, while also pushing its deposit rates to 0% in order to entice banks to lend more. The Bank of England, on the other hand, went with another route and decided to expand its bond purchasing program by 50 billion GBP, bringing the facility up to a total of 375 billion GBP.
That makes three of the world's major central banks, all introducing accommodative monetary policy measures within the span of a week. And don't forget, after last week's dismal jobs report, the Fed is expected to introduce additional QE measures as well!
It seems to me that pressure is building up to help boost the entire global economy. Keep in mind that central banks normally align monetary policy in one direction, so I wouldn't be surprised if the BOJ does the same.
BOJ Track Record
Looking back, you'll see that the BOJ actually implemented QE measures earlier this year.
Back on Valentines Day, the BOJ released an arrow into the heart of the Japanese economy, as it bought 10 trillion yen worth of bonds. It followed this up with another 10 trillion yen in late April, and even pledged to spend 200 billion yen on ETFs and 100 billion yen on Japanese real estate investment funds.
The BOJ did these moves in order to stay true to its promise of beating deflation and keeping the Japanese economy out of trouble.
However, according to BOJ official Kazumasa Iwata, said that even more bond purchasing may be necessary to reach its target inflation rate of 1.0%. Keep in mind that Iwata is also seen a potential successor to current BOJ Governor Masaaki Shirakawa, so he may try to use his position to influence other members of the BOJ.
In any case, it is pretty clear that the BOJ is keep on pumping up the economy and that is the direction the central bank is headed in.
Unwanted Yen Strength
Due to concerns on global growth, rising Spanish yields, and the disappointing non-farm payrolls, risk aversion has been the dominating market theme recently. As a result, traders have been seeking the safety of the dollar and the low-yielding yen.
Take a look at EUR/JPY's 4-hour chart. Since the start of July, it has been on a downtrend and has fallen over 400 pips. EUR/JPY is an excellent chart to examine when it comes to market sentiment, as traders see it as a barometer of risk.
Given the yen's strength, BOJ officials are starting to get worried. In fact, just two days ago, BOJ Deputy Governor Hirohide Yamaguchi cautioned the markets that if the yen's strength persists, it could hurt the country's export industries. This in turn may prompt the central bank to pull the intervention trigger again via more QE so that business sentiment doesn't suffer.
Despite all the reasons on why the BOJ could possibly expand its quantitative easing program, the market's expectation for tomorrow's meeting is generally mixed. Some expect the central bank to sit on its hands, while others believe that the BOJ will be more aggressive and expand its asset purchases. So if you're unsure on which side of the fence you want to be on, just clear up your positions and simply sit on the side lines. As the old adage goes, it's better to be safe than sorry!
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