The Bank of Japan (BoJ) raised the ceiling for its asset purchases by JPY10trn to JPY76trn. Hence, the pace of BoJ’s asset purchases will accelerate slightly to almost 9% of GDP in H1 2013 from about 8% of GDP in Q4 2012. To put this in perspective, Feds planned purchases of mortgage and government bonds is equivalent to about 6½% of GDP.
BoJ in its statement also said that the inflation target will be discussed at its next meeting in January. It now looks increasingly likely that the inflation target will be raised from 1% to 2% in connection with the issuance of a joined BoJ and government statement after the January meeting. If the inflation target is not raised in January, we think it will be raised after April when a new board governor has been appointed to the board.
The yen is stronger this morning with USD/JPY falling back below 84. The BoJ meeting might have triggered some profit-taking in yen, but the US fiscal cliff discussions (and lack of progress) is likely to be an equally important driver. Risk sentiment has weakened and also EUR/USD is trading lower.
Consensus in the market still appears to be for a political agreement in the US to be reached before the fiscal cliff is triggered. However, the closer we come to the deadline the higher is the risk of a market sell-off on the back of precautionary rebalancing out of risk assets. The best hedge still appears to be a long dollar positions against the cyclical currencies (e.g. short NZD/USD or AUD/USD via options).
Economic Research has published ‘Nordic Outlook’ today – our quarterly macro overview of the Nordic economies (see link below). Sweden is clearly slowing at the moment and we now see the main scenario for another Riksbank cut (potentially in April). Much is already priced into the Swedish money market, however, and we still see potential for a stronger krona in 2013.