The Bank of Japan held an unscheduled interest rate meeting during the early hours of the Asian session Monday, but rumors about it surfaced even as of late Friday, taking out some of its surprise element.
The unscheduled meeting comes in a very difficult moment for the Bank of Japan: the Usd/Jpy is trading at the lowest value in 15 years despite numerous verbal interventions in the currency market, while the Japanese CPI is standing at the dangerous level of -0.9%.
The temporary solution proposed by the Bank of Japan was to increase the money available to the Japanese banking system, by extending the 3-month loan supply and adding a new 6-month loan program. To some extent, this is similar to the steps taken by the European Central Bank to fight the credit crisis, but on a smaller scale.
Most parts of the market were disappointed by the decisions taken by the BoJ. Expectations were that the central bank will increase the available funds to buy government bonds, or that the central bank will publicize direct interventions into the currency market. From our point of view the first option, to increase the purchase of government bonds, would have been an optimal decision for the Japanese economy, because it would put downside pressure on the local yields and on the Japanese yen.
Judging from the market’s reaction, we reckon that the Usd/Jpy exchange rate will continue the current downtrend until the Bank of Japan will take some serious steps in fighting the current recession. One should note that this might not come any time soon, since the Bank of Japan/Government appeared unable to take a sound decision even from the beginning of the credit crisis. Ever heard of “The Lost Decade”? Now it has become “The Two Lost Decades”.
In the meantime, the actions taken Monday by the BoJ are just the start of Quantitative Easing Part II, and not just for Japan, but for most major central banks. Mr. Bernanke, you are next on the line.
Disclosure: No position
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