Kuroda Hesitates, Yen Advances, Focus Turns To Europe And North America

Bank of Japan Governor Kuroda appears to be the central banker that the markets have the most difficulty in reading. The activist Governor provides the barest of tweaks to what is by nearly any reckoning among the most aggressive monetary policies by a high income economy. Moreover, much of the important data reported during the BOJ’s meeting, including inflation and consumption were weaker than expected.  

The BOJ increased its ETF purchases from JPY3.3 trillion a year to JPY6 trillion. This was the lowest hanging fruit for the central bank, and there was broad agreement that this step would be taken. The BOJ also doubled its dollar-lending facility. And that was it. No, cut in the negative deposit rate. No additional JGB purchases. No pushing out the inflation target or increasing the JPY80 trillion monetary base growth.    

The market’s response was clear and not surprising. The yen strengthened. The dollar spiked to JPY102.70 after having been squeezed to JPY105.50 in the NY afternoon yesterday. The JPY102.25 area corresponds to a (61.8%) retracement of the greenback’s rally from the Brexit low of JPY99 to last week’s high near JPY107.50. Moving beyond that retracement objective may embolden participants to look for another test on JPY100.  On the topside, the dollar has been unable to retake the JPY104-handle since the BOJ announcement.

Kuroda’s pledge of a comprehensive review of the monetary policy framework at the September 20-September 21 meeting is not the main focus now. However, it promises to inject fresh volatility in the market after the summer. Draghi also flagged the September ECB meeting as important.

Japanese government bonds sold off hard, with the benchmark 10-year JGB yield rising eight bp, which leaves it is minus 20 bp. Japanese stocks overcame initial weakness to close higher, with the Topix up 1.2% and the Nikkei gaining almost 0.6%. On the week both indices lost about a third of a percent. Nearly all of the other markets in the region fell, and Tokyo was sufficient to lift the MSCI Asia-Pacific Index 0.5%, the fifth consecutive advance 13 of the past 15 sessions.