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Last Thursday the Bank of Japan (BOJ) caused a ruckus in the markets by not making any changes to its monetary policy. Wait, what?!

How can a no-change decision have so much impact on the major currencies?

Let’s break down the details.

1. The BOJ didn’t make any changes to its policies

As I mentioned in my preview earlier this week, a lot of market players were expecting the BOJ to add more stimulus to the economy. And why not? Japan’s indicators have been deteriorating, domestic inflationary pressures remain muted, and the yen has gained a lot of ground against its counterparts this year.

Instead, Kuroda and his gang have decided to keep their monetary policies steady. See, they believe that two months is too short to assess the impact of their latest policy changes (remember the NIRP?). Their interest rates are kept at -0.1% while the asset-buying program remains at a pace of 80 trillion JPY a year.

2. But it did change its inflation and growth estimates

With no changes to its policies, analysts paid closer attention to the BOJ’s assessment of the economy. Here’s the gist of the BOJ’s fiscal year adjustments since its January release:

  • 2016 growth down from 1.5% to 1.2%
  • 2016 inflation (y/y) down from 0.8% to 0.5%
  • 2017 growth down from 0.3% to 0.1%
  • 2017 inflation (y/y) down from 2.8% to 2.7%
  • 2018 inflation (y/y) 1.9%

There are two takeaways from the figures above. First, the central bank has further delayed the achievement of its 2.0% inflation target from the first half of 2017 to the 2017-2018 fiscal year.

Next, the low growth AND high inflation estimates in 2017 are consistent with speculations of an increase in the value-added tax, something that PM Shinzo Abe is expected to implement in April 2017.

Will this mean that Abe won’t be delaying the tax increase?

Overall the BOJ has mixed assessment for the economy, saying that growth and business investment are still on a moderate recovery trend while exports recovery had paused and some consumption indicators have shown weaknesses.

3. The BOJ allotted budget for earthquake-related projects

By a unanimous vote, the BOJ crew has decided to help restore and rebuilding operations in Kumamoto following an earthquake a few days ago. The central bank is set to provide loans of up to 300 billion JPY at a 0.0% interest rate to its financial institutions.

Since the BOJ’s NIRP charges a 0.1% rate to banks, the BOJ says that twice the amount that the banks will borrow will go to their macro add-on balances, to which a 0.0% rate is applied. Talk about giving incentives!

4. The yen shot up across the board

What surprised a lot of forex newbies was how the yen STRENGTHENED when market players were actually disappointed with the BOJ’s non-action.

Shouldn’t the yen WEAKEN in times like these? There are two possible reasons for this.

First, the lack of additional stimulus disappointed a lot of equities traders, which created a risk-averse trading environment. Ironically, it’s the low-yielding currencies like the yen that are usually pushed higher in times of risk aversion.

Major JPY Forex Pairs: 1-Hour
Major JPY Forex Pairs: 1-Hour

Another reason for the yen’s sudden and sharp strength is that forex traders have deduced that the BOJ isn’t worried about the yen’s recent gains after all.

If you recall, the yen was already around 8.6% higher against the Greenback even before the BOJ printed its decision. A non-action signaled to traders that there won’t be much opposition from Kuroda if they push the yen higher… and so they did.

Just because the BOJ didn’t make any policy changes doesn’t mean that it will continue to stand pat next month. Right now the central bank is willing to wait for a couple more months to see the impact of their negative interest rate policy.

However, Kuroda and his team might not wait if inflation continues to disappoint, weak global growth continues to threaten Japan’s exports, or if the notable yen increases persist.