The BOJ was scheduled to fire the first salvo among today’s tier 1 reports and it sure didn’t disappoint! Here’s a play-by-play recap of what the BOJ folks said and how the yen reacted.
Wave 1: Yen weakness
The BOJ caused mayhem among the yen bears when the members decided to keep its plans of expanding their monetary base by 60-70 trillion JPY. Not only that, but the central bank also stuck with its conviction that its 2% inflation target would be reached in two years (not counting the impact of the sales tax hike, of course).
It wasn’t all copy-and-paste though. The BOJ slightly lowered its real growth forecasts for the fiscal year starting April 2014 from 1.5% to 1.4% and removed its previous remarks about the “high degree of uncertainty concerning Japan’s economy” from its statement.
Not surprisingly, those who were expecting Kuroda to start the year with fresh additional stimulus eventually sold the yen. It also helped that the BOJ’s bullish outlook and conviction over its plans encouraged risk-taking. Just 2 hours after the release USD/JPY was 50 pips and EUR/JPY and GBP/JPY were already 70 pips higher than their intraday lows.
Wave 2: Yen strength
It seems that traders have missed seeing volatility. Hours after the BOJ statement’s release, BOJ Governor Kuroda turned things around for the yen after he hinted that “unless both upside and downside risks materialize,” the BOJ will really keep its policy steady.
While some think that he’s basically repeating what was in the statement, a lot of traders chose to interpret it as Kuroda saying “that’s all, folks!” and that the BOJ doesn’t have plans to add any more stimulus in the foreseeable future.
The lack of additional stimulus plans went well with the yen bulls, as evidenced by the yen crosses reversing at least half their intraday gains in the first 15 minutes of Kuroda’s speech. USD/JPY went back to test 104.25 while EUR/JPY and GBP/JPY both nearly erased their Asian session gains.
Despite the yen’s different reactions it’s clear that the BOJ is happy to stick to its plan, at least for now. Of course, volatility-loving traders can’t help but speculate that the central bank’s conviction won’t last for long. In fact, they’re already talking about the BOJ adding more stimulus once the sales tax hike takes effect in April.
Which side are you on? Do you believe that the BOJ would cushion the impact of the sales tax hike with ore stimulus or will it take more than that to loosen the central bank’s purses some more?