BoJ Watching Fed for Next Course of Action

Overnight the Bank of Japan released its monetary policy statement. It kept interest rates unchanged at 0 to 0.1 percent. This was no surprise and widely expected. It did, however, overrule a proposal for more stimuli which surprised some traders who were looking for a move similar to last month’s easing. This additional stimulus would have helped amplify the impact of the decision in February that triggered the huge sell-off the March Japanese yen is experiencing now.

Instead of the additional stimulus, the central bank decided to expand a loan program targeting growth industries. The size of the package is 2 trillion yen or the equivalent of $24 billion. This increased the amount of money available in the program to 5.5 trillion yen.

In order to implement the plan, the BoJ created several new loan arrangements including one that will tap U.S. dollar reserves for investments and loans denominated in foreign currencies.

The moves by the BoJ seemed to disappoint traders at first, triggering a slight up move in the markets. Traders thought that the central bank had in some way let its foot off the gas peddle. Some traders reacted as if the central bank had made a decision that was destined to erase most of the gains achieved following last month’s decision to ease.


Critics of the BoJ’s decision quickly pointed out that the central bank had missed a golden opportunity to press the Japanese yen further had it made a decision similar to February’s which hit the market with shock and awe while igniting the start of a sharp sell-off. One pessimistic critic called for an increase in the asset buying and loan scheme by 5 trillion yen to 70 trillion yen, but he was outvoted by 8 to 1.

The action by the BoJ to stand its ground this month was in reaction to an improving economy. It also suggests that the central bank took the right course of action as exports are expected to improve now that the yen is trading a multi-month lows. It also left open the door for further aggressive easing in April should any glitches develop in the current policy.

After traders were able to digest the report, the March Japanese yen reversed course intraday and resumed its downtrend. Technically, a new swing top was formed at 1.241. The main trend will turn up when this price is violated. A downtrending Gann angle at 1.2210 is providing additional resistance.

The monthly chart suggests the Japanese yen is headed toward uptrending Gann angle support at 1.1726 and a key 50 percent price level at 1.1634.

With tensions easing in Europe and conditions improving in Japan, the Bank of Japan appears to have finally gained control of is deflationary economy. It now has the ability to press the yen lower when it needs to although its weapons seem to be limited. Although it appears to be making the right moves at the right time, the BoJ will face a problem if the U.S. Federal Reserve decides to talk about tightening.

The point, of course, is the Fed will dictate when and how much the BoJ will have to ease in the future.