Japanese Yen Flat After BoJ Leaves Rates Unchanged
THE TAKEAWAY: Bank of Japan leaves interest rate unchanged as expected > Board leaves liquidity programs untouched and extends quake-lending deadline > Yen response muted before US payrolls data
The Japanese Yen was flat after the Bank of Japan left its key interest rate and liquidity programs unchanged, in line with expectations. The Yen briefly strengthened against the US Dollar immediately following release of the bank’s statement, but gave up those gains and continued to trade sideways in anticipation of US nonfarm payroll data due on Friday.
As expected, the Bank of Japan left its target for the key overnight rate between zero and 0.1 percent. The central bank also left its existing liquidity programs unchanged, keeping its credit-loan program at 35 trillion Yen and its purchases of corporate bonds, ETFs, and commercial paper at 15 trillion Yen. In addition, the BoJ extended its deadline for extending loans for post-earthquake reconstruction to April 2012.
In its statement, the central bank expressed concern about the state of the global economic recovery and vowed to continue monitoring the situation in Europe and the United States closely. However, the BoJ board’s statement also noted that the economy was regaining momentum following the March earthquake. Indeed, the third-quarter Tankan Business Conditions Large Enterprises Manufacturing Survey returned to positive territory, rising from -9 in the second quarter to 2, indicating that optimists outnumbered pessimists.
However, deflation and low growth continue to pose challenges for the Japanese economy. Nationwide CPI in August grew by only 0.2 percent year-over-year in August, while the economy shrank 2.1 percent annualized in the second quarter. Under these circumstances, the Bank of Japan can be expected to continue its ultra-loose monetary policy and liquidity programs for an extended period of time.
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