Yen rallies after BoJ’s less than expected stimulus announcement

Negative interest rates maintained, base money target kept at 80 trillion yen, as is the pace of purchases for other assets including government bonds

PUBLISHED : Friday, 29 July, 2016, 11:21am
UPDATED : Friday, 29 July, 2016, 6:51pm

The Japanese yen soared on Friday after the county’s moderate monetary easing policy disappointed the market.

The Bank of Japan maintained the current negative interest rates and its bond buying programme, and kept its base money target at 80 trillion yen as well as the pace of purchases for other assets including Japanese government bonds.

However, it did pledge to increase purchases of equity-traded funds (ETFs) to 6 trillion yen per annum from 3.3 trillion previously.

The announcement, made at the close of two days of policy meetings, came hours after government reports showed the economy remained weak in June. The decision follows the unchanged policies made by other central banks that are struggling to address their own challenges.

The US Federal Reserve maintained its interest rate level after mulling a rise for many months. The Fed has been thwarted by uneven economic data and global uncertainty, particularly surrounding Brexit.

The yen rallied over 2 per cent after the announcement. However, the rise reduced, with the currency trading at 103.83 to the dollar, up 1.38 per cent at 4.15 pm.

BoJ has delayed a broad review of its policy stance to the next meeting in September, probably waiting for details of the fiscal programme
Christian Nolting, global chief investment officer at Deutsche Bank Wealth Management

“The BoJ has fallen short of expectations for a serious easing package,” said Christian Nolting, global chief investment officer at Deutsche Bank Wealth Management.

“BoJ has delayed a broad review of its policy stance to the next meeting in September, probably waiting for details of the fiscal programme.”

The Japanese yen strengthened, and the Nikkei recovered to close higher, bond yields spiked higher, though bank stocks exhibited some relief.

“By leaving the negative interest rate policy unchanged and with no changes to the monetary base, there will be no yield curve pressure and no further pressure on banks,”said Paul Tsai, director of research Japan at Fidelity International.

“Banks will also benefit from the increased dollar lending facility. Increased ETF purchases will help with cross share unwinding and support the market.”

Hiroyuki Ito, portfolio manager of Fidelity Funds said in the short term he expects the yen to be range-bound between 100 to 105 against the greenback.

The Japanese stock market recovered from its early loss, with Tokyo’s Nikkei 225 closing 0.56 per cent higher at 16,569.27.

“As a stock-picker, I focus on good quality companies that are able to create new markets or increase market share,” said Hiroyuki Ito.

“I won’t be making adjustments to my portfolio on the back of this announcement – Japanese corporate results in the first quarter are more important to me now than monetary policy.”

China’s yuan traded mixed on Friday afternoon after BoJ’s policy announcements.

Offshore yuan in Hong Kong weakened slightly to trade at 6.6590 to the US dollar at 4.15 pm, 0.01 per cent, or 6 points weaker than on Thursday.

Onshore yuan in Shanghai was trading moderately stronger at 6.6522 to the US dollar, 0.03 per cent or 23 points stronger than on Thursday.

The People’s Bank of China on Friday set the yuan reference point against the US dollar at 6.6511, 86 basis points or 0.13 per cent stronger than on Thursday. Traders are allowed to trade up to 2 per cent either side of the reference point for the day.

The British pound also traded weaker, down 0.16 per cent to US$1.3183 on Friday afternoon while the euro weakened, down 0.16 per cent at 1.1101.

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