JPY Unmoved Despite Unlimited BoJ QE, Why?
As expected, at its latest policy meeting the BoJ kept interest rates at record lows of -0.1% and its long term Japanese Government Bond yield target at around 0.0%.
However, the bank removed its previous guidance that had limited Japanese government bond purchases to JPY 80trln annually. In theory, this opens up the door to unlimited QE purchases, much like we are seeing at the Fed at the moment. The BoJ also substantially increased the size of its corporate bond purchase programme.
On the surface, opening the door to unlimited QE seems like a big dovish step for the BoJ, so why did JPY not sell-off?
1) Firstly, the outcome of the meeting had already been leaked to the Japanese Press last Thursday. A Nikkie report had already given markets a heads up that the door would be opened to limitless purchases of government bonds and buying of corporate bonds would be substantially increased. At the time, JPY had sold off on the Nikkei report - as you would expect from such a dovish move.
It is important to emphasise to new traders who are learning about fundamentals; fundamental market price action is driven by expectations. When events happen in a way that is unexpected, markets move to price in the new information.
In terms of our example, markets were not expecting limitless BoJ QE at the next meeting, so when the Nikkei report came out warning that this would happen, markets suddenly priced in the new dovish information by selling JPY.
Heading into the actual meeting, expectations were now in line with the Nikkei report. When the meeting went as expected, markets were relatively unmoved.
2) The other reason why JPY was unmoved by the BoJ policy change is that many in the market saw it as a purely symbolic gesture.
As noted by RBC; “The BoJ’s purchases on JGBs (Japanese Government Bonds) have been negligible recently and were they to step up significantly, the policy would
likely conflict with the YCC (Yield Curve Control) policy.”
In simpler terms, the BoJ has a policy where it targets the interest rate of Japanese Government Bonds (10-year and lower) at around 0.0%. It does this by buying (or selling) appropriate amounts to keep the price of the bonds at a level which implies an interest rate of around 0.0%.
If the BoJ was to begin huge purchases of bonds, it would push the price of bonds up and the yield deeper into negative territory. Therefore, effectively, the door may be open to unlimited purchases, but the BoJ won’t do huge purchases because that would contradict with its YCC policy - assuming it continues to favour YCC as the more important of the policies.
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