The New, Gentler Bank Of Japan

Fundamental Forecast for JPY: Neutral

The Bank of Japan has become known as having a penchant for surprises. On the night of Halloween in 2014, the bank announced that a portion of their QE efforts would be directed towards stock purchases via ETF’s (both domestic Japanese issues as well as international ETF’s), and this caught pretty much the entire world by surprise. In short order, global stocks had run higher as news of a major Central Bank becoming a direct buyer of equities drove even more investors into stocks. And with interest rates around the world at such abysmally low levels, in the months following that Halloween announcement even more capital drove into stocks as investors attempted to chase more attractive returns. In hindsight, this decision would come back to haunt the BoJ, but this wasn’t the first surprise and it most definitely was not the last.

After that Halloween announcement, each time the Bank of Japan was scheduled to speak markets would tense up out of fear that the BoJ would bring another surprise to the table. Liquidity would fall as market makers and banks tightened up risk because guessing what the BoJ *might* do could become a costly effort.And in January, the BoJ finally delivered another surprise when the bank announced the initiation of negative rates. The decision to cut rates into negative territory, designed to stem capital flows coming into the Yen, which was creating even more strength in the currency, brought on one day of significant Yen selling before the move was quickly reversed. And on the Monday after the announcement of negative rates, the Yen began a trend of strength that lasted for another five months, wiping away over two years of weakness brought on by Abenomics.

By April, the Yen had already strengthened above the level that it was at before that Halloween surprise in 2014, and not only was the Bank of Japan back at square one, they were likely quite a bit behind the curve.