This Is Why "Everyone Was Shocked" By The BOJ Announcement

There is just one phrase to explain the market's reaction to last night's BOJ announcement that it would join the ECB, Sweden, Denmark, and Switzerland into negative territory: stunned shock.

As the WSJ writes, "many investors had anticipated an expansion of the bank’s asset-purchasing program this year, but few expected Japan to join the European Central Bank and central banks of Sweden, Denmark and Switzerland in negative territory on Friday."

Reuters add that "there’s a significant surprise factor: almost no economist was calling for this,” according to Alex Dryden, global market strategist at JP Morgan Asset Management.

And so on.

But if nobody expected negative rates out of the BOJ last night, there's a good reason for this: just one week ago Kuroda himself said on the record that he has "no plan to adopt negative rates now"

This was reported by Reuters on January 21, exactly one week before the BOJ announcement:

Bank of Japan Governor Haruhiko Kuroda said he is not thinking of adopting a negative interest rate policy now, signalling that any further monetary easing will likely take the form of an expansion of its current massive asset-buying programme.

 

"There are pros and cons of adopting negative interest rates ... The Federal Reserve didn't adopt negative interest rates and yet, its policy succeeded in stimulating the U.S. economy," he told parliament on Thursday.

 

Kuroda has maintained his optimism on Japan's economy, saying that it continues to recover moderately and is helping keep inflation on a broad uptrend. But he identified the recent global market rout as among risks to Japan's economic outlook, stressing the central bank's readiness to expand monetary stimulus if needed to ensure achievement of its 2 percent inflation target.

It seems someone made an urgent phone call into the BOJ over the next 7 days, because the next Reuters headline is the following:

From the piece:

The Bank of Japan unexpectedly cut a benchmark interest rate below zero on Friday, stunning investors with another bold move to stimulate the economy as volatile markets and slowing global growth threaten its efforts to overcome deflation.

 

Global equities jumped, the yen tumbled and sovereign bonds rallied after the BOJ said it would charge for a portion of bank reserves parked with the institution, an aggressive policy pioneered by the European Central Bank (ECB).

 

"What's important is to show people that the BOJ is strongly committed to achieving 2 percent inflation and that it will do whatever it takes to achieve it," BOJ Governor Haruhiko Kuroda told a news conference after the decision.

We disagree: what is far more important is that the BOJ, just like the Fed which admitted one week ago it hikes rates just as the economy was slowing, has demonstrated it has absolutely no clue either what it is doing, and certainly no idea how to properly communicate with the markets. For now the response is positive. We give the BOJ's action of sheer panic and desperation a half-life of a few days before the euphoria fully fizzles as China is forced to retaliate to this latest bomb explosion in an increasingly more violent global currency war.