As widely expected, the Bank of Japan (BOJ) didn’t make any changes to its interest rates in its latest monetary policy announcement. The official cash rate is still between 0.00%-0.10% and it looks like it will stay there for as long as the central bank thinks it’s necessary.
In order to keep liquidity flowing through the economy, it was decided that the size of asset purchases will remain steady at 101 trillion JPY until the end of 2013.
Overall, the tone of the statement was relatively optimistic. The BOJ has acknowledged that, although exports continue to decline, the pace of decrease has been slowing. The same sentiment has also been expressed about the economy as a whole. Japanese central bankers seem to think that the economy has stopped weakening. Going forward, policymakers believe that it will go back to the path of recovery with investor sentiment improving and domestic demand picking up.
Don’t get ahead of yourselves though. Just because the BOJ had a somewhat rosy outlook for the economy doesn’t mean that it’s ready to retire to the sidelines.
Keep in mind that the statement was released prior to the release of Japan’s GDP report. Government data shows that the economy SHRANK by 0.1% in the last three months of 2012! This translates to an annualized contraction of 0.4% and marks the third consecutive quarter of decline. Consequently, the figure has spurred speculation that the BOJ could soon launch more stimulus measures.
Meanwhile, some BOJ members have already begun to come up with even more aggressive moves for the BOJ. Ryuzo Miyao, for one, wants the central bank to follow in the footsteps of its American counterpart by tying monetary policy to economic performance. He proposed that the BOJ guarantee near-zero rates until it hits its 2% inflation target. However, this idea seems to have been too bold for the other central bankers, as they voted 8-1 against it.
The BOJ may have decided to sit on its hands this time around, but the markets aren’t expecting it to do so for long. In fact, some predict that we may see it expand its stimulus program as soon as next month!
As you can see, the monetary policy statement led to an initial spike in volatility and brought USD/JPY and EUR/JPY back up to their intraday highs. The way these pairs have defied gravity tells us one important thing: that the weak GDP combined with the flexibility of the BOJ’s monetary policy suggests that the central bank has room to ease its policy even further, despite rising concerns about the yen’s rapid depreciation.