In a major week for global interest rate prognostications the Bank of Japan met and declined to add stimulus to the Japanese economy. For now. Markets were shocked as they were expecting the BoJ to provide further stimulus for their ailing economy that is struggling with slow demand and poor consumption. As a result the yen strengthened sharply against the US dollar, moving from around 111.80 per USD to around 109.60 per USD.
The BoJ adopting a wait-and-see attitude was not on the radar of investors that had bet the central bank would act swiftly to provide further stimulus. Instead, the BoJ pushed back its timing for inflation to hit 2.0% by around 6 months. The BoJ currently increases Japan’s monetary base by ¥80 trillion (AUD$1.03 trillion) per annum through its bond purchases and, as revealed recently, its exchange traded fund (ETF) purchases.
The decision followed the release of data showing Japan’s consumer prices fell at the fastest pace in three years and household spending fell at the quickest pace in a year.
Japan’s interest rates on bonds out to 10 years are all in negative territory, with 10 year bonds trading at around -0.08% and 2 year bonds trading at -0.23%.
The meeting comes hot on the heels of the FOMC April meeting which has taken place over the past two days and elected to keep rates steady. The Fed remained “cautious” about the global economy but flagged further “gradual” rate rises. Australia’s RBA meets on Tuesday 3 May to contemplate another cut to cash rates on the back of the -0.2% headline inflation print for the March quarter. Markets are suggesting a 60% chance of a rate cut to 1.75% with Goldman Sachs, Macquarie, NAB and JP Morgan all forecasting a reduction in the cash rate.