BoJ Cuts More Than Expected, Increases Outrights

Release Explanation: This is the Interbank overnight lending rate. It sets the tone for mortgages, commercial loans, and all economic lending criteria. An increase in Interest Rate will have the effect of slowing economic growth. A decrease in Interest Rate is used by a Central Bank to stimulate economic growth. Economic strength can create Inflation, raising Interest Rates is one of the easiest ways to contain Inflation. The Governments Finance Ministry dominate the Bank, whatever they want they get.

Trade Desk Thoughts: The Bank of Japan decided by a 7-1 vote to reduce the Overnight Call Rate down to 0.10%. This comes after expectations increased that the Bank of Japan will lower the interest rate.

In the past few weeks, the BoJ policy board has appeared reluctant to reduce the interest rate any lower, saying that a low rate will discourage lending in the inter-banking system. However, after the Fed’s decision to cut the interest rate by 75 basis points, pressure from the finance minister and the government caused analysts to think the bank will reduce the interest rates, which has materialized tonight.

Having the lowest rate amid industrialized countries, until the Fed’s decision this week, economists argued that the low interest rate will not provide strong enough relief to the Japanese economy, and that the central bank has mostly depleted its powers to influence the business cycle by using monetary policy. Estimates are that the Japanese economy will contract at a 1% pace in 2009, as the slow internal and external demand drastically reduces the export market. In addition, the strength the yen has posted lately has further reduced the appeal of Japanese made goods abroad.

In addition, the Bank of Japan decided to increase the right to buy Japanese bonds, to 1.4 trillion yen ($15.7 billion) per month. This expands the bank’s operations to include floating-rate, inflation-linked, and 30-year bonds.

Forex Technical Reaction: The yen is now trading 40 pips under the Asian open price. The pair made a 30-pip spike at the time of the release, and then quickly retraced.