Yen Soars In Response To Disappointment From Bank Of Japan

The Bank Of Japan announced an easing of its monetary policy with the aim of providing a stimulus to the economy but it did not have quite the desired effect. In fact, people have been clearly disappointed by the announcement, which has resulted in the Yen jumping against the dollar. The Yen has been seeing a great deal of volatility of late and there were expectations that authorities would resort to radical measures to increase fiscal spending and to keep inflation under control.

The much awaited announcement from the Japanese bank consisted of a slight increase in purchase of exchange-traded funds (ETFs). However, it kept its base money target at a conservative 80 trillion yen. There was no indication that purchases of Japanese government bonds and other assets would be increased. Furthermore, negative interest rates were kept at their original value of minus 0.1 percent. The reason for the lack of enthusiasm with which the news was greeted were expectations that rates would be cut and that more bonds would be bought.

The announcement by the Bank of Japan saw the Yen jump 3% in value within a mere 30 seconds. The dollar traded 105.75 Yen in immediate response to the announcement, but it later dropped to 102.705 Yen (a low for 2-1/2 weeks). The dollar finally traded at 103.35 Yen, a drop of 1.8 percent. The Euro also dropped 1.7 percent to close at 114.63 yen.

The Yen has been considered a safe haven for investors and the Bank of Japan has to ensure it remains attractive by keeping the currency’s price low vis-a-vis the US Dollar and the Euro. Incidentally, there was a surge of investment into the country when Britain voted to leave the European Union, but the banks called the currency higher once more.

BOJ Governor Haruhiko Kuroda, always a supporter of looser monetary policy, has asked for the existing policies to be reviewed. This meeting is scheduled for the 20th and 21st of September. He has also committed to pumping in more stimulus from time to time. While this will no doubt keep alive the expectations that the monitory policies will be eased further, this might not be enough to prevent the Yen from asserting itself. Traders can expect a lot of volatility in the Yen until conditions become normal. The dollar/yen trading conditions had been very illiquid in the period leading up to the announcement by the BOJ. As a matter of fact, the bid to ask spread had gone up to 0.4 before it reached a more acceptable 0.2.

The Japanese government had also announced a stimulus package of 28 trillion Yen. However, this wasn’t likely to thrill investors since direct fiscal spending amounted to a mere 7 trillion Yen. It remains to be seen whether Governor Kuroda will be able to live up to his reputation and salvage the situation. As of now, he has had to face a lot of criticism from lawmakers and bankers, and even some of his former colleagues at the Bank of Japan.

Headquartered in Chūō, Tokyo, the Bank of Japan is often known as Nichigin for short. It is the central bank of Japan and like most other banks it was also founded after the Meiji Restoration back in 1882. It had to be reorganised in 1942 under the Bank of Japan Act of 1942. However, during the Occupation of Japan the bank’s functions were suspended in a brief post-war period. So in 1949 it was restructured.

Trying to Curb Deflation

The Prime Minister  Shinzō Abe urged the Bank of Japan to take proactive steps to curb deflation in Japan. In fact, in 2013, Governor Kuroda announced that it would buy bonds and securities at a rate of 60-70 million yen annually in an effort to double Japan’s money base in two years. But evidently the efforts have proved quite futile at the end of three years in 2016!