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Forex pairs in this Article » EUR/JPY, EUR/USD, USD/JPY (Barcelona) - "Please Sir, I was more" said Oliver Twist after growing tired of a thin gruel diet notes Kit Juckes, Global Head of Currency Strategy at Societe Generale, and such is the markets response to the overnight news in Japan.

The BoJ announced that from January 2014, it will embark on open-ended bond purchases, buying Y13trn in bonds a month (but only Y2trn a month in JGBs), until such a time as its new 2% inflation target is met. The new programme starts so far away because that is when the current round of bond-buying will have run its course, but Juckes feels that the BOJ could have increased the pace of bond-buying immediately, and the 2% inflation target is viewed by some commentators overnight as disappointing because there is no specific timeline attached to it.

I this sense, Juckes can see disappointment on three fronts; the inflation target has no fixed time limit, the bond purchases are still skewed to the short end of the curve, and they don't start soon enough. He notes that Japan has consistently failed to achieve 1% inflation and amusingly feels that increasing the target to 2% is akin to an overweight currency strategist aiming for greater weight loss, to make up for past failure to diet. He writes, "The key is not the target, but what is done to achieve it."

However, he notes that a commitment to buy bonds until the target is reached will lead to substantial bond purchases and will eventually bear fruit, delivering a weaker currency. The relative growth rates of the Fed and the ECB's balance sheets have been a driver of EURUSD and the BoJ is likely to be growing its balance sheet faster than other major currency banks in the future, if only because hitting the 2% inflation target is going to be very difficult.

He adds, "Oliver Twist would not be impressed by my saying that even if today's gruel still looks pretty thin, I see in the announcement the prospect of more meaningful fare in due course. I continue to believe that this move is consistent with the shift in attitude and in the direction of policy, which will deliver a higher USDJPY level over the coming year, and an overshoot above 100 in due course. This dip should prove to be a chance to buy EURJPY in particular. Chin up Ollie!"
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