Japanese Yen, Bank of Japan (BOJ), USD/JPY, Nikkei 225, TOPIX – Talking Points
- The Bank of Japan keeps interest rate targets and asset purchases unchanged
- The LDP will vote on a new leader, who is likely to deliver more fiscal stimulus
- The Yen weakened before the BoJ, will it decline further before FOMC?
The anti-risk Japanese Yen was on the defensive as the Bank of Japan monetary policy announcement crossed the wires. The central bank remained, as expected given weak inflation, growth concerns and faltering exports. The policy balance rate was left unchanged at -0.1% as the 10-year yield target on government bonds (JGB) held at 0.0%, Asset purchases remained unchanged.
The Bank of Japan has made it clear in the past that they would only consider monetary policy tightening when fiscal policy is sufficiently loose and that growth, employment and inflation are sufficient to warrant it.
Second quarter growth came in strong at 1.9% q/q but this did not include the effects of the spread of the Delta variant into the current quarter. The most recent data has shown a soft economy with machine orders for August well below expectations at 0.9% for the month and a trade balance ¥-635.4 billion for the same period.
It was the announcement of Prime Minister Yoshihide Suga’s resignation that pushed Japanese equities, such as the Nikkei 225 and Topix indices, to their recent highs. This was in anticipation of another round of fiscal stimulus measures that could arrive with a new leader. The BoJ decision was widely expected as the extent of the extra government spending is yet to be orchestrated.
In the hours leading up to the BoJ meeting, the PBOC announced an injection of liquidity and the property group, Evergrande, announced it had negotiated payments with its debt holders. This saw the Yen weaken as risk appetite returned to markets across the board.
The restructuring of Evergrande debt may see further risk appetite that could undermine the Yen. This could be welcomed by the BoJ as a cheaper Yen can assist exports and push its trade balance further into surplus territory. All eyes will now be on the FOMC meeting and the consequences for markets from any tapering adjustments.
USD/JPY Reaction to Evergrande and Bank of Japan
The USD/JPY moved up – which showed the Yen weakening -, more on the Evergrande debt restructuring news than the BoJ monetary policy announcement. As such, the pair will continue keeping a close eye on general market sentiment.
— Written by Daniel McCarthy, Strategist for DailyFX.com
To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter