- Boj cut rates because a further QE would have had a marginal effect and because this action saved them from having to further expand their balance sheet
- With no sign in sight of inflation reaching 2% we believe that Japan's qualitative and quantitative easing has firmly failed
- JPY will weaken further in the coming days as negative interest rates drive investors out of yen positions
- With only the US in a rate hike process, we cannot see how the Fed will to raise rates in March
- There are good chances that the current monetary policy divergence will pause
A few hours after the Japanese Ministry of Internal Affairs released depressing inflation figures, Governor Kuroda took the market by surprise as he announced that the BoJ will adopt negative interest rates, arguing it will stimulate investment and consumption. The market’s reaction did not take long. The Nikkei jumped instantaneously by more than 4% to 17,638 points before collapsing to 16,767 points, to return finally above the 17,500 level. The sharp moves betray the market’s mixed feeling regarding the BoJ decision. Indeed, rumour are spreading that the central bank cut rates because either they realized that the marginal effect of an increase of the QE are very small - and they don’t want to expand their balance sheet further - or they couldn’t find any assets to buy. However, one thing is sure, inflation is still well below the BoJ’s target and showed no sign of picking up. On the FX side it was also rollercoaster session for JPY crosses. USD/JPY jumped from 118.50 to 121.41, then fell to 119.13 before bouncing back again to 120.70. In the end, the Japanese yen fell 1.50% against the greenback, 1.70% against the pound sterling, 1.10% against the euro and 1.15% against the Swiss franc. USD/JPY is currently testing the resistance implied by its 50dma (at 120.33). We expect the JPY to weaken further in the coming days as the negative interest rates will drive investors - the ones who were taking shelter amid the recent risk-off environment - out of yen positions.
Elsewhere, Asian regional markets were almost all trading higher amid the BoJ’s decision. In mainland China, the Shanghai and Shenzhen Composite were up 3.09% and 3.71% respectively, while in Hong Kong the Hang Seng was up 2.27%. In Singapore the STI rose 1.90%, while in Taiwan the TWSE was up 2.22%. European futures are also trading higher with the Footsie up 1.09%, DAX +1.16%, CAC +1.17% and SMI +0.95%. US futures are also wearing green this morning: S&P500 up 0.83%, Nasdaq 0.71% and Dow Jones +1.03%.
***Yann Quelenn, market analyst: “Yesterday’s surprise move by the BoJ followed the release of some very weak data. The Tokyo CPI printed well below expectations at -0.3% y/y vs 0 and the December industrial production disappointed markets with a low read at -1.4% m/m. The central bank is very concerned about the true state of the Chinese Economy as it could raise the risk of deflation. The issue of low oil prices also adds some deflation pressures. However, we also believe that in this case qualitative and quantitative easing has firmly failed. There is not a single sign to indicate that inflation will reach 2% and the country’s massive debt-to-GDP ratio does not help. For these reasons, the BoJ may even be willing to cut interest rates further. In our view, BoJ was in fact already all-in, in efforts to spur the economy. Like Draghi, Abe will also do “whatever it takes”. It seems that only the United States is in a rate hike process when the whole world is struggling for sustainable growth. Therefore, we cannot see how the Fed could raise rates in March. Consequently, there are good chances that the current monetary policy divergence will pause.”***
Yesterday, another fresh batch of weak economic data were released by the US. Durable goods orders collapsed by an astonishing -5.1%y/y in December, while previous month figures were revised lower from 0.0% to -0.5%. As a result the US dollar moved lower with EUR/USD hitting 1.0968. The dollar index fell to 98.43. However, the greenback recovered overnight amid the BoJ’s decision to bring rates into negative territory.
Today traders will be watching Turkish trade balance; CPI and GDP from Spain; unemployment rate from Norway; CPI from the euro zone; trade balance from South Africa; GDP and industrial price index from Canada; GDP, core PCE, Chicago purchasing manager and personal consumption from the US and Michigan Index.