Last night’s monetary policy decision from the Bank of Japan
saw further support provided to the Japanese economy. The BoJ added to its
existing asset purchase programme by Y10trn, taking the total purchases to
Y80trn. This Y10trn increase has come earlier than many expected and was certainly
more than most market players expected. BoJ also extended the deadline for the
end of the programme by six months to the end of 2013.
Nerves over the global economy are a major factor behind the
BoJ’s decision. The US
recovery remains shaky, the risks of a Chinese hard landing are rising, while
there is little doubt that the eurozone has not seen the worst of the current
economic contraction.
Global conditions have contributed to what the BoJ has
described as a “pause” in the domestic Japanese economy. BoJ Governor Shirokawa
has said the Japanese recovery has been set back by six months thanks to a
prolonged global economic slowdown. Exacerbating the domestic growth outlook is
the fact that a territorial dispute between China
and Japan threatens to
disrupt trade relations, something Japan can ill-afford.
Also in the BoJ’s mind will be the desire to curb the appreciation
of the yen, which is hurting the Japanese economy. Particularly in light of the
US Federal Reserve at last announcing QE3 this month, another move from the BoJ
was always likely. However, the yen hasn’t weakened off today as much as the
Japanese official would have liked. It has retraced almost all of last night’s
losses, which demonstrates that there is no guarantee that QE will weaken a currency.
Richard Driver
Currency Analyst
Caxton FX
