It’s official, folks! The Bank of Japan (BOJ) is following the footsteps of the Fed and adopting open-ended asset purchases. That’s right, Prime Minister Shinzo Abe got what he wanted – unlimited easing! Furthermore, the BOJ announced in its monetary policy statement that it’ll be adopting a new “price stability target.” In other words, it’s lifting its inflation target from 1% to 2%.
How did this match up with early expectations?
Well, let’s just say that it didn’t disappoint.
Ahead of the statement, a lot of people had anticipated a big announcement from the BOJ, as Shinzo Abe had been pushing it to raise its game and take a bolder stance. Truth be told, many had already predicted that the BOJ would shift its inflation target up to 2%, a move proposed by Abe. They’re hoping that raising the inflation target will finally put an end to deflation and allow the central bank to take more aggressive steps towards lifting the economy.
Interestingly enough, we saw consolidation ahead of the BOJ statement, even though the expectations were that we’d hear about more bond purchases. I suppose traders wanted to be a lil’ more cautious and not get caught with their hands in the cookie jar in case we got any major surprises!
Once BOJ officials announced that it would be rolling with an unlimited easing strategy, the yen sold-off like a new version of the iPad. USD/JPY shot up over 50 pips in a matter of minutes, while other yen crosses also soared up the charts. It looked as if the yen was in for another beating!
However, as soon as you could say “Nintendo Wii U”, the move was faded and USD/JPY gave back all its gains and then some! Looks like the bulls just don’t have enough juice to push past the 90.00 mark!
It will be interesting to see though, how this pans out over the first quarter of the year. In the past three months alone, we’ve seen the yen drop over 10% against the other major currencies. Now that the BOJ is committed to buying endless amounts of bonds, chances are that we’ll see the yen bears continue to dominate the market.
This in turn, may lead to pressure from other countries telling the Japanese government to not intervene in the markets.
As recently as yesterday, Bundesbank President Jens Weidman warned the Japanese government not to weaken the yen by excessive bond purchasing. According to Weidman, if countries begin a race to devalue their currencies (in order to boost exports), it could destabilize financial markets as it would lead to a surge inflation and compromise central bank independence.
Of course, I think the BOJ is more concerned about the state of the domestic economy than it is warnings from central bankers halfway across the globe. That said, I don’t see it backing off its strategy. Only time will tell though whether this strategy will actually pay dividends and save the Japanese economy.