Yen Jumps as BOJ Disappointment Sinks Bonds

The Bank of Japan’s most anticipated policy announcement in years left investors underwhelmed, sparking a surge in the yen and sending Japanese government bonds to their biggest retreat since 2008. Oil slumped, while European stock-index futures rose.

Japan’s currency jumped 1.7 percent against the dollar after the BOJ kept its government-bond buying target and policy interest rate unchanged, opting instead to increase the central bank’s exchange-traded fund purchases. Yields on 10-year JGBs jumped 10 basis points, while the Topix index rose on the expanded ETF program. The MSCI Asia Pacific excluding Japan Index fell 0.4 percent and oil headed for the biggest monthly drop in a year. Futures on the Euro Stoxx 50 Index gained 0.5 percent.

A week of dramatic swings in the $5.3 trillion-a-day foreign exchange market is ending with a bang as traders digest the BOJ’s decision, upcoming results of bank stress tests in Europe and second-quarter economic growth figures in America. Investors will also be watching corporate earnings from Barclays Plc to Exxon Mobil Corp. for further clues on how global monetary stimulus is filtering through the economy.

The BOJ’s expanded stimulus “was as minimal as possible,” said Stefan Worrall, director of equity cash sales at Credit Suisse Group AG in Tokyo. “The tension was extremely high going into the announcement, and the market has reacted in a way that has perhaps reflected that built-up tension.”

Kuroda led his board in voting to expand an ETF program to 6 trillion yen ($58 billion) a year, the BOJ said. Thirty-two of 41 analysts in a Bloomberg survey had forecast some kind of stimulus expansion — the highest percentage of respondents in the poll in more than three years. In one unexpected development, Kuroda ordered an assessment of the effectiveness of BOJ policy at the next meeting, which is scheduled for September.

The announcement comes after decisions this month from the Federal Reserve, the European Central Bank and the Bank of England to leave their key interest rates unchanged as they assess the economic fallout from the U.K.’s vote to leave the European Union. Kuroda is holding a press conference on Friday afternoon in Tokyo.

“The BOJ’s disappointment, which also follows the ECB and BOE’s recent decisions to hold off easing, may just cause markets to re-assess whether they had front-run things too much,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore.

Currencies

The yen climbed to 103.62 per dollar at 7:29 a.m. London time. It strengthened against all 31 major currencies tracked by Bloomberg, bringing its gain against the dollar this year to about 14 percent.

“The BOJ is too hesitant,” said Shane Oliver, Sydney-based global investment strategist at AMP Capital Investors Ltd., which manages more than $110 billion. “Today’s move is incredibly disappointing. Perhaps the BOJ wants more help from the government in terms of the stimulus and they’re not prepared to do anything in advance.”

Prime Minister Shinzo Abe unveiled a 28 trillion yen fiscal stimulus package two days ago that will now bear the main burden for stoking expectations for growth and inflation. The BOJ had come under increasing pressure from the government to make a move that dovetailed with its own package, making it tough for Kuroda and his team to leave policy entirely unchanged today.

Away from the yen, foreign exchange markets were more subdued. South Korea’s won strengthened 0.4 percent against the dollar to lead gains among emerging-market currencies. The Chinese yuan slipped 0.1 percent, paring a weekly gain. The euro strengthened 0.1 percent.

Bonds

The yield on 10-year JGBs increased to negative 0.18 percent, while rates on similar-maturity U.S. Treasuries climbed 3 basis points to 1.54 percent. Australian bonds reversed an early gain that had sent yields to all-time lows.

“The market was very unimpressed,” said John Gorman, head of non-yen rates trading for Asia and the Pacific at Nomura Holdings Inc. in Tokyo.

The BOJ decision followed a slew of key economic indicators for June released Friday, showing household spending slumped while industrial production rose more than economists forecast. Consumer prices dropped for a fourth consecutive month, illustrating how far prices are from the central bank’s 2 percent inflation target.

Stocks

Japanese stocks recorded big swings after the BOJ decision, before rising 1.2 percent at the close.

“The ETF purchase is directly good for the market,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co. in Tokyo. “The BOJ didn’t go further into negative rates, so it’s good for the financial stocks.”

The MSCI Asia Pacific excluding Japan Index fell for the first time this week, while Singapore’s Straits Times Index lost 1.3 percent. Hong Kong’s Hang Seng Index retreated 1 percent and S&P 500 Index futures were little changed.

Commodities

Oil headed for the biggest monthly decline in a year as brimming crude and fuel inventories force a retreat toward $40 a barrel. Futures in New York dropped 0.6 percent, extending their July loss to 15 percent.

Spot gold was little changed at $1,334.31 an ounce after earlier rising in the wake of the BOJ decision. Industrial metals retreated, with copper losing 0.6 percent in London and nickel falling 1.8 percent.

Source – Bloomberg