The Bank of Japan maintained a steady course at its monetary policy evaluation meeting last week, with only a marginal cutting of expenses to consider uncertainties surrounding overseas economies.
More exchange-traded funds will be acquired, however, there was no shift to the deposit rate nor the government bond buying program.
Currency traders had been anticipating a more definite move, and conveyed their disapproval by driving the USD/JPY pair down to 102 by the end of Friday’s session in New York, while bond dealers pushed the yield on Japan’s ten year government bond higher from -0.28 percent to -0.18 percent.
The post-meeting statement provided support to the markets with the pledge of a comprehensive assessment of quantitative easing effectiveness at the central bank’s next meeting on September 20-21.
In afterthought, it looks like traders had not become fully aware of the implications for monetary policy of Prime Minister Shinzo Abe’s extensive stimulus package, introductory details of which were announced in the previous week.
On the other hand, Bank of Japan Board members made a significant increase into their updated economic forecasts, in turn enabling them to hold the line on inflation estimates for 2017 and 2018. No change to the outlook meant no change in monetary policy.
Still, attainment of the 2 percent inflation target has been beaten again in 2017.
A few hours ahead of Friday’s meeting close, the June inflation update indicated the Bank of Japan’s benchmark, national core consumer price index, had dropped at a year-on-year rate of 0.5 percent. Meanwhile, core-core consumer price index, which excludes energy prices, was gaining at a meager 0.4 percent.
However, the flash estimate for July showed a slight improvement.
According to the Bank of Japan, under average inflation in fiscal year 2016 is a result of the recent appreciation of the yen and a plunge in inflation forecasts suggested by the sluggishness in base pay.
BOJ’s Helicopter Money
The Bank of Japan’s analysis of its monetary stimulus program guaranteed for September has restored expectations that it could take up some form of helicopter money, or printing money for government spending to drive inflation.
On Friday, the central bank disappointed market beliefs that it might raise its heavy buying of government debt or reduce already negative interest rates, sealing the perspective that it is running out of options within its current policy framework to lift prices and cease two decades of deflationary pressure.
With little to present for three years of massive monetary easing, analysts say BOJ governor Haruhiko Kuroda’s comprehensive assessment of policy could nudge it into closer cooperation with Abe, who disclosed a fiscal spending package amounting to over 28 trillion yen on Wednesday in an attempt start growth.
"The comprehensive review might be the first step toward further collaboration with the government, hinting at helicopter money," an economist stated.
"The government could issue 50-year bonds, and if the BOJ makes a commitment to hold them for a very long time, that would be like helicopter money."
Japan’s Nikkei opened lower on Monday as the Bank of Japan disappointed the markets with underwhelming adjustments to its stimulus measures.
Nikkei was up 0.05 percent at 16.578.09, but plummeted to 16.319.15 earlier in the session. According to reports, the US dollar lost 3 percent against yen on Friday after the US GBP report was released.
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