BOJ inaction rocks markets

Stock markets around the globe are trading substantially lower this morning following the decision overnight from the Bank of Japan to stand pat on their current monetary policy. Expectations for further stimulus were seemingly commonplace amongst market participants and the lack of further expansionary policies from Governor Kuroda has seen the Yen surge higher and stocks tumble.The reverberations of this can clearly be seen in Europe with the FTSE 100 off by over 1 per cent shortly after the open, trading down to levels not seen in over a fortnight.

Has monetary policy in Japan run it’s course?
The third central bank policy announcement in less than twelve hours came from Tokyo and caused a far greater reaction in the markets than the previous two, as elevated expectations for further stimulus meant the decision from the BOJ to bide their time caused huge moves in both the currency and stock market. The size and scope of the moves observed following the Federal Open Market Committee (FOMC) and Reserve Bank of New Zealand (RBNZ) paled in comparison to the Bank of Japan (BOJ) and together they serve as a lesson in market expectations, as all three rate setting bodies chose to not significantly alter monetary policy and were met by varying degrees of movements in the market. After taking the unconventional step of implementing negative interest rates earlier this year, it appears BOJ Governor Kuroda wants to assess their impact before deciding on the necessity of further easing, and despite his protestations in the press conference this morning that he doesn’t see a limit to monetary policy, the markets are clearly questioning whether the unprecedented massive stimulus package which began in April 2013 is suffering from diminishing marginal returns.

Greenback fails to gain on hawkish shift for the FOMC
As was widely expected, the US central bank chose to keep rates on hold last night and the choice of language in the accompanying statement seems an apparent attempt to project to traders that the next meeting in June should be viewed as “live.” Whereas the BOJ announcement was met by wild swings in the market, the aftermath of the FOMC release was fairly subdued, as the US Dollar first appreciated on the hawkish comments regarding further improvement in the labor market and the downplaying of global economic risks before falling back in the hours following. Despite efforts to prepare the markets for the possibility of a rate hike as soon as the next meeting, it appears the path of future monetary policy in the US forecast by market participants is lower than the Fed would like and unless this view is revised higher in the coming months it will remain unlikely that we see a resumption of the bull run that has seen the US Dollar rally over the past couple of years.