The Bank of Japan defied expectations and its economic assessment to leave policy unchanged. The inaction spurred a 3% rally in the yen and an even larger slump in stocks. The financial sector took its the hardest and dropped almost 6%. The yen's surge helped underpin other Asian currencies, especially the South Korean won, which gained nearly 1%.
At the end of January, the BOJ surprised by adopting negative interest rates for a small part of Japanese banks' excess reserves. The yen strengthened markedly. Now the BOJ disappoints in not easing policy. Prior to the BOJ's announcement, and in response to poor data that showed the most deflation in three years (-0,3% year-over-year on a core measure of CPI that excludes fresh food), a larger than expected slide in overall household consumption (-5.3% year-over-year), the dollar had approached JPY112.00. The dollar dipped briefly below JPY108 in early European activity. The greenback sits near its lows ahead of the start of the North American session.
The BOJ did do something. It cut its inflation and growth forecasts and delayed for the fourth time in around a year when it would achieve its inflation target. It now stands at some time in the next fiscal year. We have long argued that it is unhelpful for the BOJ cast its inflation target as a near-term objective. Other major central banks are talking about their inflation target as a medium-term objective, and this provides more degrees of freedom.
BOJ Governor Kuroda sounded dovish, and the pressure to ease policy in the coming months, perhaps in July, remains possible. The ostensible argument for standing pat is to monitor the impact of the recent easing. However, the BOJ's economic forecasts are consistent with the aggressive easing having little positive impact. Some speculate the Kuroda was sending a message to the Abe government, consistent with the G7/G20 concerns about the over-reliance on monetary policy. The lack of new monetary action may add pressure on the government for a bolder fiscal policy initiative.
The Nikkei sold off hard. We had warned yesterday that should the BOJ disappoint, the Nikkei could fall toward 16773. In fact, it fell to 16652 and closed on its lows. Depending, of course, on what happens over the next 12 hours, the Nikkei could gap lower tomorrow. The downside risk extends toward 16000 now.
Most Asian markets fell, and the MSCI Asia-Pacific Index slipped 0.2%, extending its declining streak to the fifth consecutive session. Recall losses at the start of last week snapped an eight-day advance. European bourses are lower, and the Dow Jones Stoxx 600 is off 1.25%, led by health care and financials. The S&P 500 is trading nearly 0.8% lower.
The push higher in global bond yields ended with a bang today. Core 10-year benchmarks in Europe are off six bp. Of note so is the 10-year Portuguese bond. Tomorrow DBRS will review Portugal's credit rating. It is the only rating agency that the ECB uses that give Portugal an investment grade. If it takes it away, Portuguese bonds will not qualify for purchases under the ECB's bond-buying program. It would join Greece and Cyprus.
The US 10-year yield, which had been approaching 2.0% earlier this week, fell yesterday after the FOMC failed to alter investors skepticism about a June hike. Perhaps in anticipation of easier BOJ policy would spur Japanese demand for US Treasuries also weighed on yields. Today the yield is close to 1.80%....MORE