The yen soared against other major currencies on Thursday after the Bank of Japan surprised markets by keeping monetary policy unchanged at its April meeting. Expectations had been building since last Friday that the Bank would announce fresh stimulus measures following reports that policymakers were considering broadening the use of negative interest rates.
However, speaking at the press conference after the meeting, the Bank’s governor, Haruhiko Kuroda told reporters that the Bank is not thinking about applying negative rates to lending facilities. Kuroda also remained optimistic on the prospects for longer term inflation expectations and on GDP growth, while reiterating the Bank’s readiness to act if necessary.
The only new decision to come out of the central bank was to establish a 300 billion yen loan program for banks in regions affected by the earthquake that hit Japan earlier this month.
The dollar tumbled against the Japanese currency after today’s announcement, reversing all of the past week’s gains. It was last down by almost 3% at 108.12 yen in late Asian trading. The euro and the pound also both fell sharply against the yen, dropping to 122.81 and 157.70 yen respectively.
The Bank of Japan’s decision of no action comes despite worse-than-expected inflation figures. Annual inflation in March fell to -0.1% from 0.3% the prior month, missing estimates of 0%. The core rate also disappointed as it fell to -0.3% instead of the expected -0.2%.
There was some good news however from industrial output and household spending data. Industrial production rose by 3.6% month-on-month in March, beating forecasts of 2.9%, while household spending was up by 0.5% between February and March against expectations that it would fall by 0.3%.
Meanwhile in the United States, the Federal Reserve kept its main policy rate unchanged yesterday as was widely expected but kept the possibility of a June rate hike open. The FOMC statement sounded less dovish than some analysts had expected as there was no reference to the downside risks posed by the global economic slowdown. The committee also maintained its positive outlook on the US labor market.
However, with only one committee member voting in favour of a rate rise, the markets will need more convincing that the Fed is preparing to move in June. As a result, the dollar slipped in the currency markets after the Fed’s decision. The euro was up 0.3% at 1.1356 dollars in today’s Asian trading.
Also standing pat was the Reserve Bank of New Zealand, which kept its cash rate unchanged at 2.25%. There had been growing expectations that the RBNZ might cut rates for the second straight month following the New Zealand dollar’s recent strong gains. But the central bank chose to hold policy steady at its April meeting while maintaining an easing bias.
The kiwi jumped after the decision to climb to a one-week high against the US dollar at 0.6984. The Australian dollar was also firmer on Thursday on the back of a weaker greenback. The Aussie moved away from yesterday’s lows when it had slumped by 2% against the US dollar to rise to 0.7650 in late Asian session.
Coming up later today, it will be relatively quiet in the European session with no major data expected apart from flash German inflation numbers and Eurozone economic sentiment. The focus will then shift to US advance GDP estimates later in the US session. The US economy is forecast to have expanded at an annualized rate of 0.7% in the first quarter, which is half the rate seen in the previous quarter.