Week in FX Asia – BOJ Pulls a Trick and Treats Global Markets

• BOJ announces unexpected stimulus addition to monetary policy
• USD/JPY breaks through 110, headed to 112
• BOJ AND Government trying to avoid inflation target failure

The Bank of Japan (BOJ) surprise stimulus announcement jolted the market on Halloween day. By dropping no hints of imminent action, and instead playing down doubts over Japan’s economic price prospects, has allowed the BoJ to spring the biggest of Halloween surprises. Governor Haruhiko Kuroda likes to shock, as he is looking for the market’s biggest impact. Overnight, the BoJ unexpectedly announced additional stimulus measures that include upping its asset purchases total to ¥80-trillion from the previous ¥60–70-trillion target range. This is the first time in 18 months that Japanese policymakers have bolstered asset purchases; the bank’s +2% inflation target looks increasingly unattainable.

USD/JPY has climbed sharply on Friday, as the pair trades in the mid–111 range in today’s session. The pair jumped after a surprise announcement by the BOJ to increase stimulus by raising its monetary base target to JPY 80 trillion annually.

The USD has gained about 250 points against the yen on Friday, as the Japanese currency finds itself close to 7-year lows. The yen took a tumble after the BoJ surprised the markets with a move to increase monetary stimulus. The monetary base target has been increased from JPY 60–70 trillion per year to JPY 80 trillion. The BoJ said that the move was needed to increase inflation, which remains short of the central bank’s target of 2%.

The BoJ was the main driver of the first arrow of Abenomics and was the most proactive central bank in 2013. That year, both the Federal Reserve and the European Central Bank (ECB) backtracked on earlier statements and were subsequently heavily criticized for it. The BoJ “walked the walk and talked the talk” with the announcement it would double the monetary base at the end of year, and the JPY fell accordingly as Japan was on track to import inflation.

Abenomics might have worked if the Japanese economy would not have been hit by four factors: the deterioration of trade with China, energy and food price instability, JPY as a safe haven, and the negative effect on growth from the second arrow and a sales tax hike last April.

Bank officials were so sure they could hit the target that they disregarded their own forecasts pointing to 2016 as a more likely timeframe for when inflation would reach 2%. Earlier this week the central bank’s deputy governor told parliament that its inflation target was not set in stone like a train timetable. Quite a remarkable admission considering the pledge the bank made 18 months earlier. The added stimulus from the BOJ today display further commitment from the central bank towards reaching that time table… even if they are not willing to admit there was one in the first place.

Next Week For Asia:

The Bank of Japan rocked the markets as traders were already preparing for the weekend. Next week the Reserve Bank of Australia (RBA) will announce its rate decision. There is little change expected from the RBA, but after the BOJ surprise traders will be keeping an eye down under. New Zealand and Australia will also report unemployment rates during the week. Given the drop in the commodities markets from which the two economies depend for most of their exports, there have been cutbacks as companies have had to adjust to lower demand and lower prices.

There are two major events during the week. The Bank of England and the European Central Bank will announce their benchmark rate. As with the RBA there are no changes expected as the BOJ seems to once again lead with example on the stimulus front as it did in 2013. The BOE could take a cue from the Fed and begin cutting back on its bond-buying program, but that seems unlikely given the dark clouds that have begun to appear above the UK economy and upcoming elections next year reward prudence over speedy action.

The U.S. Non-farm payrolls will be published on Friday. The biggest economic indicator in the forex market can further validate the Fed’s decision to end its quantitative easing program off the table and build more confidence in the growth of the U.S. economy. This in turn would boost the USD strength versus all pairs. Last month’s figures came in at 248,000 added jobs and while expectations are for a lower number as long as it is above 200,000 it can justify the strong USD position.

WEEK AHEAD

• USD ISM Manufacturing
• AUD Reserve Bank of Australia Rate Decision
• NZD Unemployment Rate
• AUD Unemployment Rate
• GBP BOE Asset Purchase Target
• GBP Bank of England Rate Decision
• EUR European Central Bank Rate Decision
• USD Change in Non-farm Payrolls
• CAD Unemployment Rate