Japan shocks global markets by expanding monetary stimulus as the Fed calls time on quantitative easing

Claire Hogarth03/Nov/2014Currency Updates

As the largest economic experiment of our generation draws to an end in the US, it seems to be about to be pushed even further elsewhere after the Bank of Japan shocked global markets and announced plans to expand its bond-buying quantitative easing programme.

In a statement released on Friday the Bank of Japan announced, as expected, that it will be maintaining its record low interest rate of 0.1% that has stood since late December 2008. However, in a surprise move, the central bank revealed that it will be ramping up its monetary easing programme, adding an extra 20 trillion Yen to the current asset-buying scheme, bringing the annual total to ¥80 trillion (around $730bn). The move is the first since the large bond-buying scheme was launched in April of last year and caused significant ramifications for the currency which hit just shy of a seven year low against the Dollar, falling 2.2% in a frantic few hours (Figure 1). The Nikkei 225 index, the stock market index for the Tokyo Stock Exchange, soared by nearly 5% in the belief that a weaker Yen would benefit Japan’s main exporters.

Japan’s economy has been under increased scrutiny recently following further weak inflation data and dipping GDP. The National Consumer Price Index fell for the fifth consecutive month in September to 3.2% YoY, while GDP suffered its worst contraction since 2011 in Q2, shrinking 7.1% on an annualised basis after the economy was hit by a sales tax hike in April. The bank acknowledged that the tax hike jeopardised its chances of reaching its 2% inflation target for next year, passing a narrow 5-4 majority vote to increase the stimulus measure.

The Bank of Japan’s decision perfectly illustrates the contrasting evolution of the US and Japanese economies, coming right after the Federal Reserve’s decision on Wednesday to stop further purchases of US financial assets. The end of the scheme, which started way back in November 2008, has significant implications for interest rates, with the US now almost certain to be the first of the world’s major economies to hike rates. In a hawkish monetary policy statement on Wednesday the central bank opened the door to an interest rate hike, acknowledging that the likelihood of low inflation and the underutilisation of labour had diminished. A similar hike in Japan, and in the Eurozone for that matter, seems many years off. ECB President, Mario Draghi, has gone as far as suggesting that full-blown quantitative easing may be an option for the Eurozone, amid weak growth and the increasing threat of deflation. The UK appears to be somewhere in between, with economists predicting a September 2015 hike for the Bank of England.

As for Japan, the Yen has now lost just under a third of its value against greenback since October 2012 (Figure 2) and is perfectly in line with our forecasts of reaching 113 against the Dollar by the end of the year. The contrasting state of the two economies means that this trend will almost inevitably continue through 2015. We forecast the Yen will hit 116 in early 2015 before reaching 125 by the back end of next year.

If you want to find out how these events may affect your currency trading, get in touch today on 0845 519 1009.

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Written by Claire Hogarth

Marketing Executive at Ebury. English Literature graduate from the University of York and a motivated professional.