We all saw it coming – after the Liberal Democratic Party of Japan sealed its landslide victory in the elections, everyone and his grandma expected the Bank of Japan (BOJ) to announce another expansion of its asset purchase program.
It was a reasonable assumption, after all. Incoming Prime Minister Shinzo Abe, leader of the LDP, has been one of the strongest supporters of easy monetary policy, and he hasn’t been shy about his stance either. In fact, he’s been very vocal about it, pressuring the BOJ to increase its inflation target and implement unlimited easing. Some even thought we’d hear more about the Stimulating Bank Lending Facility that was announced back in October 30.
But how did the BOJ react to Abe’s calls? Obediently, it seems!
Well, it didn’t announce any changes to interest rates (which are already at near-zero levels), but it did deliver another 10 trillion JPY in stimulus. Now, Japan’s asset purchase fund stands at 76 trillion JPY. The BOJ has been buying up asset like cray-cray this quarter, and some estimate that the central bank may keep buying at a rate of 8% of GDP next year, especially now that we’ve got extra-dovish Abe heading the country.
Some say that the worse-than-expected Tankan report from Japan only gave the BOJ one more reason to give in to the LDP’s calls. And so, in order to help boost the economy, the BOJ will soon implement its Stimulating Bank Lending Facility in January 2013.
Similar to the BOE’s Funding for Lending Scheme, the program will provide banks with unlimited access to liquidity at an interest rate of 0.1% for maturities that last until three years. The BOJ hopes that it will be able to spur lending and consequently boost Japan’s growth as the economy deals with European debt crisis and shaky U.S. recovery.
With regard to inflation, the Japanese central bankers have yet to do their homework. The statement revealed nothing about increasing the inflation target range from 1%-2%. But it did say that medium- to long-term targets will be discussed in the next meeting on February.
We didn’t see much movement on USD/JPY following the release of the statement probably because most of it was just what market participants were expecting. The pair spiked at the wake of the announcement, testing the Tokyo session highs and 84.00 handle.
But wait! Don’t go on thinking that yesterday’s rate decision wasn’t a big deal. There’s more to it than just the yen’s initial reaction.
Perhaps the biggest takeaway from it is that the BOJ could be losing its independence. Remember that the central bank ideally shouldn’t be affected by whatever happens in the political arena. However, it seems that central bankers have no choice. BOJ Governor Shirakawa is due to step down in April. The government can also increase its influence as it is scheduled to appoint two deputy governors in March.
With that in mind, some market junkies warn that you shouldn’t be surprised if the BOJ announces more easing measures and an upward revision to its inflation target since the LDP is pushing for these.
As for the yen, further weakness could be limited in the short-run given that the currency was already sold off aggressively over the past few months. But in this old man’s opinion, we could see it continue trading lower in 2013 as the BOJ adopts more aggressive policies to weaken it.
That’s just me though. What do you think?