Yen Volatile After BoJ Expanded Bond Purchase, Spain Yield Watched After Downgrade

BoJ left rates unchanged at 0-0.1% on Friday. Also, the bank decided to boost government bond purchase by JPY 10T. In addition, BOJ will also expand purchases of ETFS by JPY 0.2T and REITS by JPY 0.1T. On the other hand, BoJ reduce the six-month fixed-rate loan by JPY 5T due to lackluster demand. The bank also extended deadline for the asset buying target by six months, with 2012 year end target unchanged at JPY 65T and the now JPY 70T target will be met in June 2013.

Overall, BoJ expects that "together with the cumulative effects of earlier policy measures, today's decision to further enhance monetary easing will better ensure the return of Japan's economy to a sustainable growth path with price stability." The bank expects inflation to approach its 1% target as early as in 2014.

Economic data released from Japan saw national CPI rose more than expected by 0.2% yoy in March but Tokyo CPI dropped deeply by -0.5% yoy in April. In March, the unemployment rate was unchanged at 4.5%, household spending rose 3.4% yoy, industrial production rose 1.0% mom, retail sales rose 10.3% yoy, housing starts rose 5.0% yoy. Data were mixed. Despite some volatility, the Japanese yen didn't weak after all the events today and is mildly firmer against other major currencies on risk aversion.

The euro weakened broadly as S&P rating downgraded Spain's long-term sovereign credit rating to BBB+, by two notches from A. This was also the second downgrade this year. Also S&P gave Spain a negative outlook. The rating agency warned that "Spain’s budget trajectory will likely deteriorate against a background of economic contraction." Meanwhile, there is needed for "further fiscal support to the banking sector." And, thus, "there are heightened risks that Spain’s net general government debt could rise further." Spanish benchmark 10-year yield dipped back below 6% this week and today's focus will be on whether it will jump back above 6% again.

US Q1 GDP will be a major focus today and markets are expecting growth to slow to 2.5% annualized, down from Q4's 3.0%. Recent job market data, with initial claims stayed above 380k level for three consecutive weeks, triggered some concern on the recovery momentum. Anything around 2.5% - 3.0% should ease growth worries. But market sentiments could have a turn if the figure came in lower then 2.5%. Other data to watch include Swiss KOF, US employment cost and U of Michigan sentiment final.