"Surprise" was the word used this morning to describe the Bank of Japan (BoJ)'s decision not to cut interest rates.
In the stage-managed world of central banks, "surprise" is not a good thing. When Mario Draghi last caught the markets off guard just a few weeks ago when he said he could not see the European Central Bank (ECB) cutting interest rates, investors piled into the euro – probably the exact opposite of super Mario's plan.
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The BoJ, however, is a little different. Early this year it shocked markets with its announcement that it would be joining the ranks of central banks playing around with negative interest rates.
Either way, markets thought that was it as far as unforeseen moves went. Yesterday, the BoJ was supposed to do at least two of the following three things:
- Cut interest rates from the current level of minus 0.1 per cent
- Hike quantitative easing to more than 80 trillion yen a year
- Introduce new loan support for banks which would effectively pay them to borrow
Instead, however, it plumped just for option number three – something the markets were already well aware of thanks to some leaked memos which were doing the rounds at the end of last week.
Therefore, there was a bit adjusting to do once the announcement was made early this morning.
Traders could not yet enough of the yen when the news broke. It soared by 2.71 per cent against the dollar almost immediately.
"The most immediate impact to the BoJ decision was a huge rally in the Yen," said Craig Nicol a reseach analyst at Deutsche Bank.
A buck will now get you 108 yen – down from 120 at the start of the year. That's a ten per cent appreciation despite the fact that the US Fed is a tightening phase and the BoJ is in a loosening one.
Japanese stock markets mirrored the yen's ascent with a mighty fall from grace.
The Nikkei 225 – Japan's benchmark – dropped 3.6 per cent on Monday, taking it down to 16,666. That's back in line with the levels it was at in February and March, but a sharp revision from what looked to be tentative signs of a stock market rally.
— Ross Finley (@rossfinley) April 28, 2016