Danske Daily: The Overnight Markets‏

This morning Bank of Japan (BoJ) announced that it will set a 2% inflation target and that it will shift to Fed-style open-ended asset purchases in 2014. The bank will buy about JPY13trn in assets per month starting January 2014. This will include about JPY2trn in JGBs and JPY10bn in treasury bills. However, the pace of asset purchases in 2013 was maintained. BoJ said it will pursue monetary easing and aim to achieve this target at the earliest possible time. It previously said it would ease until the former 1% target was ‘in sight’. Hence, we should expect BoJ to pursue a very easy policy for a very long time. BoJ expects CPI to gain a modest 0.9% in the fiscal year 2014.

The move toward a 2% inflation target was fully in line with market expectations, whereas the open-ended asset purchases are a surprise move. It is a bolder move than most investors had been expecting ahead of the announcement.

However, the BoJ did not expand its asset purchases for 2013 and its asset purchases planned for the open-ended easing in 2014 are in fact relatively modest. Due to the short duration of the BoJ purchases, the open-ended easing will only add JPY10trn net to the balance in 2014. In addition, BoJ did not cut banks’ interest rate on deposits at BoJ or increase the maturities for its bonds purchases as there had been some speculation about. Furthermore, the BoJ press release reveals that two members, Sato and Kiuchi, dissented. They are normally considered dovish and they might have been dissatisfied that BoJ did not introduce an even more aggressive move.

The market reaction to the announcement has been a mild disappointment reflecting the focus on the numbers for 2013. Hence, USD/JPY has moved below 89 after the initial spike higher when the open-ended easing phrase hit the trader screens. Nikkei that has performed very strongly the past couple of months dipped 0.8% this morning. We do not think that USD/JPY is in for a trend reversal after today’s announcement. If the yen starts to appreciate, we are certain that we will see new measures from BoJ and the government. Hence, we still forecast that both EUR/JPY and USD/JPY will move higher in 2013 but the pace will most likely slow now.

The U.S. market was closed yesterday for Martin Luther King Day and the presidential inauguration. In the European markets all focus is on the LTRO repayment later this week that recently has pushed rates in the euro area higher. This morning we will publish a note on the market effect of the LTRO repayment.

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