Yen Advances on Dollar and Euro After Modest Stimulus Plans

The Japanese Yen has appreciated in value against major currencies in the aftermath of what the market saw as modest stimulus measures, that were announced by the Bank of Japan (BOJ), where the spending to ease monetary conditions reached 28 trillion Yen.

Against the US dollar the USD/JPY rate fell to a nadir of Y103 from the Y105.5 yesterday, but the Yen did rise earlier to Y104.5, highlighting the markets disappointment with the measures taken, the Yen also appreciated on the euro, and is now up to Y105, after the Yen fell to just over Y104.

The modest monetary expansion by the BOJ was blamed on the decision by the UK to leave the European Union, increasing the uncertainly that the markets face in the short and longer term.

In  a statement, the BOJ announced that will purchase exchange traded funds (ETF), so increasing at an annual pace of an estimated 6 trillion yen, almost double the previous pace of about 3.3 trillion yen.

There was a unanimous vote to smooth funding in foreign currencies, by increasing the BOJ’s lending programme growth in the accumulation of US dollars, the Bank will increase the size of its lending program to support growth in US.

This is targeted to increase by $24 billion, around Y2.5 trillion, and double the previous size of $12 billion , under this lending program, the BOJ provides its US dollar funds for a period of up to four years, to support Japanese firms’ overseas activities through financial institutions.

Additionally, the  BOJ will establish a new facility in which it lends Japanese government securities (JGSs) to financial institutions, against their current account balances with the BOJ, in order that these JGSs can be pledged as collateral for the dollar fund supplying initiative.

The central bank will also  purchase government bonds  at an annual pace of 80 trillion Yen, with the view to encourage a decline in interest rates, the purchases will be made in a flexible manner depending on market conditions, the average maturity on the bonds will range between seven and 12 years.

Also, the bank will maintain the minus 0.1% in negative interest rates, that was supported by a 7-2 margin by the BOJ’s policy board members, for current accounts held by financial institutions in the BOJ, the bank will also keep buying an annual amount of commercial paper and corporate bonds at Y2.2 trillion and Y3.2 trillion respectively.

In their daily round up of the foreign exchange markets, LMAX Exchange said that all of this speculation of a big bazooka stimulus package from the BOJ, ended in disappointment to the market, with USD/JPY collapsing as a result.

Perhaps some of this USD/JPY decline has been cushioned by the news of an expansion of in ETF purchases, and the set up of a new facility to lend JGBs, but the Y80 trillion asset purchasing programme was not what the market was looking for.

Looking ahead, it will be interesting to see if this BOJ disappointment has a more sustained negative impact on risk assets, and the market will continue to digest the implications of the event risk for the remainder of the day.