With high expectations for the BoJ to ease further after the recent strong rally of the yen and weak core inflation readings, the central bank left its three key easing tools unchanged catching some investors off guard. The central bank’s inaction did little to help the continued strength of the yen which breached the ¥108 level today (in London trading hours), soaring ~3% against the dollar.
Back in January the BoJ’s adoption of negative rates took the market by surprise, again, it was not a popular move and was in fact counter-productive as the yen began its ascent against the dollar. This time round the bank has wrong-footed a number of investors whose expectations were for the central bank to deliver further monetary stimulus; especially after Governor Kuroda’s comment that the central bank “would not hesitate to take further easing measures” in order to reach its targeted inflation - which has consequently been pushed out, for the fourth time, into the next fiscal year.
The move has had little impact on our portfolios. We do however believe that the BoJ have actually missed a trick and markets are quickly losing confidence in the central bank. We understand the reasoning behind the BoJ’s decision to monitor the effect of January's negative interest rate decision over a longer term. However, the wrong signals have been sent to the market which expected the bank would, at the very least, expand its bond-buying program, and/or boost its ETF exposure and possibly go further into negative rates. In his statement post-announcement, Kuroda did comment that venturing further into negative interest rates was not off the table. What is however, is stimulus in the form of “helicopter money” which he said cannot be adopted “under Japan’s current legal system”. One has to wonder whether the central bank is running out of options. The market will now look to Prime Minister Shinzo Abe for any hints of fiscal stimulus to spur growth.
Elsewhere, the FOMC remain broadly unchanged and “continues to monitor inflation indicators and global economic and financial developments”. A recent pickup in China data has helped reduce the risk of “global economic and financial developments”. Concern has shifted to US domestic economic activity which appears “to have slowed”. Today we had the release of Q1’16 growth in the US which the market expected to be around 0.7%; the Atlanta Fed and New York Fed called for 0.6% and 0.8% respectively. The reading disappointed at 0.5% qoq annualised, the slowest pace of growth in two years. Forecasts had been as high as 2.5% back in January! US Treasuries and the dollar did not seem to react to the miss with the 10-yr yield and DXY Index trading more or less within range. Since 2010 we have seen weaker Q1 readings, averaging 0.8%, however this year there were limited “adverse weather conditions”, or “residual seasonality”, coined by the Commerce Department. Despite the Fed’s favoured core PCE Q1’16 reading (+2.1% qoq) beating market consensus of 1.9% qoq, a June hike is looking ever less likely.