Bank of Japan falls in line with Prime Minister Shinzo Abe’s policies

4th April 2013

The Bank of Japan appears determined to meet the new inflation target of two per cent confirming the new Bank of Japan Governor Haruhiko Kuroda’s apparent complete acceptance of the policies of Japanese premier Shinzo Abe.

The immediate impact has been more than two per cent fall in the value of the yen while markets have jumped four per cent.

Nathan Gibbs, Manager of the Schroder Japan Alpha Plus fund says: “The extension of the duration for Japanese Government purchases and the adoption of a two-year time horizon to achieve the inflation target suggest a fairly radical change of direction within the Bank. The resulting statement issued by the Bank on Thursday afternoon in Tokyo was strongly worded and had a significant impact on financial markets, with the equity market gaining around 4 per cent in the 90 minutes after the announcement and the currency weakening rapidly by about 2.5 per cent against the US Dollar – a huge move for such an actively traded cross-rate.

“Perhaps one reason for the positive reaction was the fact that the nine-member Policy Board was almost unanimous in its support for the changes announced with only one dissenter on some specific issues. This suggests that there has been some real change of thinking within the Bank, and investors may therefore be able to look forward to further policy initiatives over subsequent meetings.”

Gibbs suggest that focus will now have to turn to structural reforms.

“To a large extent the Bank can now be seen to have “done its job” in the near term and attention will shift to Government policy and the issue of structural reform which is desperately needed in order to ensure that any nascent economic improvement can be translated into a long-term revival in Japan’s underlying growth prospects,” he says.

Chris Towner, director of FX advisory services at foreign currency specialists HiFX says: “They have approached this both quantitatively by expanding the balance sheet aggressively and qualitatively by increasing the choice of assets they can purchase.

“This massive purchase programme will continue to put downward pressure on long term interest rates stimulating Japanese investors to stop sitting on cash and safe haven assets and start to buy equities and other more attractive assets for their yield differential.”

“The knock-on effect has been a weaker yen and this is bound to re-ignite talk of currency wars. The yen has for a long time now been considered a safe-haven and led to their currency to strengthen tipping Japan from an economy with a trade surplus to a trade deficit. The recent actions and resultant yen weakness will allow Japanese goods to become attractive in price again in the global markets and re-balance the economy back to an export-led economy much to the annoyance of their competitors. And we can expect further playing of hard ball by the Japanese.

“The yen has weakened across the board overnight by over 2 per cent; however by more than 15 per cent since this policy was first announced.”

Mindful Money economics writer Shaun Richards is not impressed with move suggest monetary policy has lost its mojo.

 

 

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