The yen surged more than 3% and the Tokyo stockmarket sold off heavily yesterday after the Bank of Japan left monetary policy unchanged, denying hopes for a significant easing from the market on a day data emerged showing the country had fallen back into deflation for the first time since 2013.
The yen rose to just under 108 yen from just over 111 yen on Wednesday afternoon in Tokyo, while the Nikkei fell 3.6%.
In fact the yen soared more than 3% in just four hours yesterday, one of the fastest appreciation on records according to the Financial Times.
In fact all the weakness in the yen since the Bank of Japan expanded its quantitative easing program in October 2014 has now been erased.
The deflation news (but better data on employment, and industrial production) means the Bank of Japan’s three year attempt to rid the economy of falling prices has failed abysmally.
The bank signalled that more monetary easing remains possible, saying the risks to economic activity were “skewed to the downside”.
It said it stood ready to “take additional easing measures in terms of three dimensions — quantity, quality and interest rate — if it was judged necessary for achieving the price stability target”.
The BoJ dropped its economic forecasts. It cut its growth forecast for the fiscal year to March 2017 from 1.5% to 1.2%, and its forecast for inflation excluding fresh food to 0.5% from 0.8%.
And that raises the question why the bank didn’t move yesterday when it had ample evidence that its policies have failed.
The central bank’s attempts to weaken the yen has also been exposed as a failure, especially since the January 29 statement when the central bank revealed its now controversial negative interest rate policy for a small part of bank deposits held with the bank.
But the yen has risen by more than 12% since then while the Tokyo market (as measured by the narrow Nikkei index) had fallen 7%, while the economy has slowed and probably remained in recession in the first quarter.
The only thing that can save the Bank of Japan’s reputation (and perhaps boost the economy), is another rate rise by the US Federal Reserve. There was none at yesterday’s Fed meeting, and now its down to the June meeting for a second rate rise in more than 8 years.
But will it with the Fed’s two day meeting on June 16 and 17 occurring a week before the controversial Brexit vote in the UK which could see Britain vote to leave the EU, a move that could trigger a new round of market tremors on a part with those which roiled markets in January.
Many economists and analysts had been expecting a policy change at yesterday’s meeting – such as a cut interest rates again, an increase the pace of asset purchases from the current 80 trillion yen a year, or buying more equities, or negative rates on loans to banks (to help their thin profit margins).
But the only change was a minor subsidy to earthquake-hit banks on the southern island of Kyushu, providing them with zero-interest loans and exempting more of their balances from negative interest rates.
Earlier yesterday the usual end of month data dump showed the headline consumer price index fell 0.1% year on year in March on a year ago, compared the central bank’s target of 2%.
Japan’s labour market saw the unemployment rate down to 3.2% from 3.3%. But real wage growth is weak, consumer spending is weak and business investment is also weak.
