Thursday, April 28, 2016

Markets: The Yen and The Yang

A shaky market trying to forget the early Q1 blues just need another focus shift to scare itself in to another round of sell-offs. And the BoJ action today may as well be the catalyst.

BoJ has very few solid reasons not to act today: The inflation prints have been horrible, in the negative territories. Even the core inflation (ex fresh food, the measure BoJ prefers) registered negative. If I am not mistaken that will be lowest since BoJ expanded the QE in line with Abenomics in 2013. The market actions, either from the  breakeven inflation markets, or the recent rally in yen, does not support any case of enthusiasm there either. Negative rates so far is quite untested for jacking up inflation expectation. They have been successful for exchange rates policies in smaller European nations, but for Japan the market has given a clear thumbs down with yen rallying instead. And the Japanese banks have not been much amused with it either. That, and many other things (jump to first of Q&A), will possibly floor the use of negative rates in future.

There are three possible interpretation here. The first one is that BoJ gave it a pass to focus in June, by which time a Fed course of action will be clearer and probably priced in - this implies a question of time. Second, BoJ is really more optimistic than markets, which implies a question of further data. And lastly, BoJ is running out of options. This is the worst of course. In principle it is hard for a central bank to run out of options. But honestly, looking ahead for Japan, one can be hardly optimistic about the effectiveness of a monetary lever.

Whichever the case, if markets interprets things more in the line of the third, it is not going to be nice.

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