Bank of Japan runs out of road

September 21, 2016

The Bank of Japan delivered a whole heap of nothing at its policy meeting today, although some adjustments were made to its policy framework. If you take the time to read through these measures, then the impression is of a central bank that has largely lost the monetary plot and is undertaking an ever more complicated and convoluted approach to monetary policy. The new regime is called “Quantitative and qualitative easing (QQE) with yield curve control” but there is also “QQE with a negative interest rate”. It’s like watching a film where the plot gets ever more complicated until you don’t have a clue what is going on or who is involved with what. It would be far easier if the BoJ held its hands up and admitted that monetary policy measures had reached the end of the road, but somehow the government may not like that. USDJPY popped higher as a result of the lack of robust policy action, whilst stocks were also higher. This reaction could struggle to be sustained, as in the aftermath the market could well conclude that these measures amount to nothing.

As if this wasn’t enough excitement for one day, the long-awaited Fed decision arrives later. As we know, the market is pricing in a limited chance of a hike in rates, only around 20%. This does not preclude a change in rates, but generally the Fed likes to lead markets by the hand and such an unexpected change in rates would not be taken well by market and stock especially. On the unchanged scenario, it’s all about the tone of the statement. If largely unchanged, emphasising the data dependency of the next move, then the dollar is likely to soften modestly. If the Fed decides on a more hawkish stance (less likely in my view), then the dollar will rally, especially against the lower yielding currencies (such as the Swiss franc and euro).

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