profit taking hits yen & Nikkei following BoJ inflation targeting decision

The Bank of Japan announced overnight that it was to press ahead with its most determined effort yet in ending years of economic stagnation. Officials stated it would switch to an open-ended commitment to buying assets next year and double its inflation target to 2 percent – a measure the market had priced in over recent weeks. It looks to us as if the BoJ is potentially gearing up to buy certain equities –  a measure that will be unequivocally positive for the equity market in the medium term. 

It promised to reach the inflation goal “at the earliest possible time.”

The BOJ’s break from an earlier policy of topping up a lending and asset buying programme launched in October 2010 follows weeks of relentless pressure from newly elected Prime Minister Shinzo Abe for a greater push to lift the moribund economy out of recession. In a joint statement with the government, it affirmed a well-flagged move to commit to the inflation target. Consumer price inflation has reached 2 percent in only a handful of months since the late 1990s.

But aware that markets had already factored in the new price goal and more asset buying and that merely meeting those expectations could trigger a negative reaction, central bankers took steps that several analysts thought would only come later.

“This is very good news. For once, the BOJ has been more aggressive than the market expected,” said Brian Redican, senior economist at Macquarie in Sydney. “The government is clearly forcing the pace of change, which is no bad thing.”

The central bank said that from 2014 it would switch to an open-ended approach of buying a certain amount of assets — 13 trillion yen (91.3 billion pounds) — each month without setting a deadline for completing the purchases. Make no mistake, this is serious monetary easing.

By doing so, the BOJ, often criticised for its step-by-step easing, would be emulating the U.S. Federal Reserve, though analysts were quick to point out that unlike the Fed, the BOJ delayed until next year the launch of the open-ended buying scheme.

The yen, which inched up ahead of the policy announcements, fell immediately after the decision, though later crept up higher.

Several analysts also said the BOJ could still do more and there will be expectations that it will follow through with further steps mooted by politicians, economists and some central bank policymakers.

One such step would be to scrap the 0.1 percent floor for short-term interest rates, while another would be for the central bank to buy longer-duration bonds.

“There’s still a lot of work to do, and still a lot of room for improvement,” said Tadashi Matsukawa, head of fixed income at Pinebridge Investments in Tokyo.

Abe, who led his Liberal Democratic Party to a landslide victory in a December 16 parliamentary election and made aggressive budget and monetary stimulus a centrepiece of his campaign, hailed Tuesday’s action as a game-changing breakthrough.

“It is ‘epoch-making’ in a sense of bold review of monetary policy,” he told reporters. “It has become clear that there will be a ‘regime change’ in macro economic policy.”

Abe’s pledges to boost public spending and repeated calls for more BOJ action helped reverse a long-term rise in the yen and set off a stock market rally led by exporters and construction firms at the beginning of October – a move we flagged extensively here.

The yen lost 13 percent against the dollar in the past two months, hitting a two-and-a-half-year low above the key 90 level low on expectations of bolder central bank action. Tokyo stocks have gained a fifth on the view the weaker yen will boost the export earnings of the likes of Nissan Motor Co and Canon Inc.

The yen’s declines, however, have drawn complaints from countries like Russia and Germany, worried that it could set off destabilising currency devaluations. A bit rich considering the veiled currency wars that are occurring all around the glove.

In a sobering reminder that Japan still faced an uphill battle in pulling out of more than a decade of low-grade deflation, the BOJ’s updated economic forecasts showed core consumer prices inching down in the current fiscal year and up only 0.9 percent in the fiscal year ending in March 2015.

“Headline says core inflation at only 0.9 percent in 2014 so when will they meet their inflation target of 2 percent?” asked Joseph Capurso, currency strategist at Commonwealth Bank Of Australia in Sydney.

We have been taking profit on our Japan position in recent weeks and will look to get aggressively long again on any move back below the 10000 level.