Forex Flash: Yen to strengthen further as BOJ caution disappoints – BTMU
FXstreet.com (Barcelona) - Derek Halpenny, European Head of Global Markets Research notes that the Yen has strengthen in the aftermath of the BoJ announcement as the financial markets conclude the bank as being somewhat more cautious than expected.
Firstly, he adds that the key elements expected today have by and large been met with the bank announcing its move from a 1.0% to 2.0% inflation target. Additionally, there was a joint statement with the government in regard to working more closely to tackle deflation in the economy. Thirdly, the bank eased its monetary stance further.
Halpenny notes that the vote for the change in the inflation target was 7-2 while the time frame was ambiguous as expected, with the BoJ committed to achieving this "at the earliest possible time". He writes, "In the joint statement the BOJ committed to easing in order to reach its goal while the government committed to implementing growth strategies and improving Japan's medium to long-term fiscal health."
Where the disappointment in today's announcement lies is in the relatively modest degree of additional easing undertaken by the BOJ. Firstly, there has been no change to the asset purchases planned for 2013, already agreed at previous meetings. The easing announced today is "open-ended" starting in 2014. The buying per month appears large at JPY 13 trillion - but only JPY 2 trillion of that is fresh JGB buying with the remainder short-term T-bill buying. This scale of purchases only increases the APP by JPY 10 trillion in 2014 as a whole. This is due to the average maturities of JGBs and T-bills already purchased. So there is a JPY 24 trillion increase in JGB buying in 2014 that results in a JPY10 trillion increase in the size of the APP.
Halpenny explains that effectively, the BoJ is committing to roughly maintaining the current pace of JGB buying in 2014 as in 2013, despite the fact that the BoJ today agreed to double the inflation level that it is obliged to achieve from 1.0% to 2.0%. There had also been hope that the BOJ would extend the maturity of assets purchased under APP in order to reduce the rate of roll-off of assets from the APP. However, the BOJ did not change this which was further evidence of caution in terms of the BOJ's willingness to increase the size of the APP over time.
In terms of riskier assets beyond JGB's and T-Bills, the BoJ committed to maintaining the current size of these holdings. These steps, when scrutinized will be deemed as too cautious given the substantial change in its objectives. For example, if QE3 was to carry on through 2014, the Fed would be buying just over $1 trillion, and the BoJ just $280 bln. The net increase by the BoJ is just $120 bln. He finishes by writing, "With so much expectations ahead of today's meeting and after such a large sell-off of the yen on the back of aggressive BOJ easing, there is clearly scope for a notable yen rebound."
Firstly, he adds that the key elements expected today have by and large been met with the bank announcing its move from a 1.0% to 2.0% inflation target. Additionally, there was a joint statement with the government in regard to working more closely to tackle deflation in the economy. Thirdly, the bank eased its monetary stance further.
Halpenny notes that the vote for the change in the inflation target was 7-2 while the time frame was ambiguous as expected, with the BoJ committed to achieving this "at the earliest possible time". He writes, "In the joint statement the BOJ committed to easing in order to reach its goal while the government committed to implementing growth strategies and improving Japan's medium to long-term fiscal health."
Where the disappointment in today's announcement lies is in the relatively modest degree of additional easing undertaken by the BOJ. Firstly, there has been no change to the asset purchases planned for 2013, already agreed at previous meetings. The easing announced today is "open-ended" starting in 2014. The buying per month appears large at JPY 13 trillion - but only JPY 2 trillion of that is fresh JGB buying with the remainder short-term T-bill buying. This scale of purchases only increases the APP by JPY 10 trillion in 2014 as a whole. This is due to the average maturities of JGBs and T-bills already purchased. So there is a JPY 24 trillion increase in JGB buying in 2014 that results in a JPY10 trillion increase in the size of the APP.
Halpenny explains that effectively, the BoJ is committing to roughly maintaining the current pace of JGB buying in 2014 as in 2013, despite the fact that the BoJ today agreed to double the inflation level that it is obliged to achieve from 1.0% to 2.0%. There had also been hope that the BOJ would extend the maturity of assets purchased under APP in order to reduce the rate of roll-off of assets from the APP. However, the BOJ did not change this which was further evidence of caution in terms of the BOJ's willingness to increase the size of the APP over time.
In terms of riskier assets beyond JGB's and T-Bills, the BoJ committed to maintaining the current size of these holdings. These steps, when scrutinized will be deemed as too cautious given the substantial change in its objectives. For example, if QE3 was to carry on through 2014, the Fed would be buying just over $1 trillion, and the BoJ just $280 bln. The net increase by the BoJ is just $120 bln. He finishes by writing, "With so much expectations ahead of today's meeting and after such a large sell-off of the yen on the back of aggressive BOJ easing, there is clearly scope for a notable yen rebound."
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