BoJ Jumps the Shark as JPY Implodes on Surprise Easing
Pop quiz: you're a central banker whose country is aging rapidly and currently in enormous debt. Consumption trends are wallowing after fiscal authorities levied a tax hike six months earlier, and purchasing power is declining because the weak currency is exacerbating the costs of foreign imports. Speaking of which, your country imports over 80% of its energy. What do you do?
The answer, according to the Bank of Japan, is to ease more. A lot more. The BoJ shocked market participants (as evidenced by the outsized reaction in the JPY-crosses and global equity markets) by increasing the size of its monetary base expansion target to ¥80 trillion, from the ¥60-70 trillion level established in April 2013.
The BoJ's decision has two roots. First, a government report released earlier in the day showed that Japanese inflation has slowed to its lowest level in six months. a clear sign that elevated inflation earlier in the year was in part due to high energy costs. Oil prices have fallen over 20% in the past four months.
The other major reason the BoJ chose to make an announcement today is because of Japan's $1 trillion pension fund, the GPIF, announcing that it would begin shifting its portfolio allocation in favor of foreign bonds and equities. This formidable one-two punch of monetary and fiscal policy today may be the BoJ's "whatever it takes" moment to prevent the "deflationary mindset," as BoJ officials call it, from setting back in.
This is important because the BoJ's decision supports further Yen weakness, enhancing capital outflow out of Japan. Risk assets, particularly carry trade components, are well-supported on the news.
--- Written by Christopher Vecchio, Currency Strategist
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