BOJ Goes Zero

It looks like nothing is impossible for the Bank of Japan (BOJ), not even zero interest rates! Yesterday the central bank officials lowered the target rate from 0.1% to a range of 0% to 0.1% in an effort to support their struggling economy. Aside from that, they also announced that they are pooling funds together for another round of quantitative easing. In fact, they even are considering a 5 trillion JPY expansion of its easing program.

Hmm, is this simply another stunt designed to tame the surging Japanese yen? Some forex geeks think so. Another possibility is that the BOJ is really alarmed by the weaknesses in their economy and is convinced that another round of stimulus measures is necessary. Let’s take a look at the recent economic figures from Japan to find out, shall we?

First, Japanese exports already fell for the sixth straight month in August when last week’s trade balance report printed at 0.59 trillion JPY. While some say that the cooling global demand was to blame, others think that the strong yen finally caught up to the competitiveness of Japan’s exports.

Japan’s inflation rate was also considered in pumping out the stimulus. Japan’s CPI figures have been popping in and out of “deflation” status for 15 years, but the challenge got harder since 2009 when the inflation rate dropped to lows that remind me of former president Bush’s ratings.

Finally, the last straw on the BOJ’s back might have been Japan’s slipping GDP figures. After hitting an annualized rate of 5.0% in the first quarter of 2010, the country’s growth rate dipped to only 1.5% in the second quarter.

Today, it appears that traders believe that the BOJ’s move will be good for the economy. Upon the bank’s announcement, Nikkei flew to new intraday highs and was even able to post its largest gain in a day in three weeks of 1.5% by the end of the Tokyo session. Yowza!

As for the yen, you’d expect it to drop across the board on the BOJ’s decision to consider expanding its QE, but the currency’s reaction was quite mixed. Although it fell against the euro and the pound, the yen actually gained versus the dollar.

That being said, I’m not too sure whether the BOJ’s moves will be enough to stop the economy from falling in deeper into the deflationary pit. They have gone this way before in the past and it wasn’t very effective. For now, we’ll have to wait and see how the bank’s surprise move will affect the economy.