Bank Of Japan Shocks Market, Shuns Government Pressure: Leaves QE, Rates Unchanged, Questions Policy Effectiveness

Expectations were extremely high heading into tonight's BoJ decision, and market liquidity disappeared with massive violent swings in FX, rates, and equity markets before Kuroda unleashed his disappointing statement:

  • *BANK OF JAPAN TAKES ADDITIONAL ACTION
  • *BOJ EXPANDS PURCHASES OF ETFS TO 6T YEN
  • *BOJ DOUBLES USD LENDING PROGRAM TO $24B

But...

  • *BOJ MAINTAINS POLICY BALANCE RATE AT MINUS 0.100%
  • *BOJ BOARD VOTES 7-2 TO KEEP NEG RATE UNCHANGED
  • *BOJ MAINTAINS MONETARY BASE TARGET AT 80T YEN

Finally, details are emerging of the stimulus package, NHK reporting:

  • ~7.5t yen of fiscal spending
  • ~6t for fiscal investment and loan financing program
  • 15,000 yen handouts for low-income people
  • 10.7t yen for infrastructure spending such as maglev line, ports
  • 10.9t in SME support to weather Brexit

And most fascinatingly...

  • *KURODA ORDERS ASSESSMENT OF POLICY EFFECTIVENESS NEXT MEETING

Raising doubts about the whole house of cards.

So to summarize, Kuroda left rates unchanged, left QE unchanged, implicitly raised doubts about the effectiveness of the world's monetray policy machinations.. and increased the stock market ETF buying to make sure that the illusion of normality is maintained.

As we noted this afternoon, the worst case for Yen shorts would be if the BOJ simply does what both the ECB and the Fed did in recent days and punts to September.. and sure enough: markets are unahppy...

 

JGB Futures are crashing most sicne 2013...

 

As 2Y Yields soar...

 

Yen strength is weighing on US equity futures through the carry trade and gold is jumping...

As one twitter-er noted so eloquently: US equities have rallied for weeks in part on BOJ expectations. Now nothing much, oil on its knees, earnings neg (still).. ok good luck buying

*  *  *

As we detailed earlier, before the statement, 32 of 41 analysts (the most in 3 years) expected an expansion of QQE2 shifting to ETFs (because that worked so well), but surprises will be hard to come by...

“It’s Kuroda -- you can’t underestimate what he is going to do,” said Yasuhide Yajima, chief economist at NLI Research Institute. “What’s certain is that Kuroda has to do something extreme or unthinkable if he wants to surprise.”

2Y JGB yields were screaming for moar....

 

JGBs had been halted...

And FX market liquidity disappeared..

Total chaos. Nikkei Futs crash 600 points instantly...

*  *  *

Morgan Stanley economists Robert Feldman, Takeshi Yamaguchi and Shoki Omori, writing in the firm's Global Macro Summer Outlook, say Japan's policy approach is having weak short-term impact:

"The BOJ’s negative interest rate policy (NIRP) has bull-flattened the yield curve, but has yet to improve the economy or prices; indeed NIRP may have worsened inflation expectations, and started a credit crunch for small businesses."

The spectrum of forecasts includes a boost to government bond buying to as much as 100 trillion yen a year -- up from 80 trillion, quadrupling exchange-traded fund buying and cutting the policy interest rate to -0.3 percent. A more radical option: a pledge to maintain the BOJ’s balance sheet in its forward guidance.

Prime Minister Shinzo Abe’s government has added pressure for bolstering monetary stimulus at this meeting. Abe in a surprise announced his economic package on Wednesday, which economists including Daiju Aoki saw as an intention to pressure the central bank by showing the government it is doing what it can to spur growth.

So this was a big disappointment.

Some may see it as a step toward hitting policy limits, with growing concerns about the sustainability of the easing program. There’s a limit to the amount of bonds in the market and the faster the BOJ buys them, the sooner it hits the ceiling. The size of the BOJ’s balance sheet is now more than 80 percent of Japan’s gross domestic product.

 

 

Charts: Bloomberg