Schroders Quickview: Bank of Japan surprises markets with inaction
The Bank of Japan’s regular policy meeting ended in Tokyo on Thursday with the policy committee deciding to take no action.
In the event, this was a major surprise.
In recent weeks the consensus expectation had formed solidly behind the view that the central bank would extend its negative interest rate policy which was introduced in January, and also extend the asset purchase programme.
However, today’s decision seems to imply that the policy committee feels more time is needed to judge the impact of the most recent changes before extending policy further.
The decision was particularly surprising as the latest inflation data, which was also released today, showed a marked slowdown in progress towards the central bank’s own inflation target of 2%.
Indeed, in its statement today the committee implicitly extended the deadline to reach that 2% target into the latter part of 2017.
This admission that the target has become harder, without any additional policy response, led to an immediate decline of around 4% in the stockmarket from the levels seen in the morning session.
At the same time there was a sharp strengthening of the yen as currency markets priced-in the effective change in expected interest rate differentials.
Some of the current deflationary impact is clearly due to external forces, including the weakness in the price of oil which forms a major part of Japan’s imports.
Nevertheless, financial markets had already reflected the change in expectations with the implied inflation rate in index-linked bonds declining this year from around 0.8% to 0.3%.
Most surveys of individual consumers in Japan also suggest that the gradual increase in inflationary expectations which has been generated in the last three years has begun to tail-off.
Inconsistency introduces uncertainty
Regardless of the actual level of interest rates or details of policy, the main issue around today’s decision is one of inconsistency.
Although Governor Kuroda has successfully surprised investors with the timing of previous decisions, the direction of his policy has always been absolutely clear.
As a result, most investors have been prepared to accept his assertion that he would do “whatever it takes” to raise inflationary expectations. With those inflationary expectations now in decline, the lack of response today introduces an element of uncertainty which the financial markets may view negatively.
Of course, the central bank’s policy objective is to influence the real economy, not the stockmarket, and we must wait longer to see if the current policy is indeed sufficient to maintain the positive underlying trends we have seen so far.
Important information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This article is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get back the amount originally invested. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored.