Given the strong language used in recent weeks by the Governor and the Prime Minister, Shinzo Abe, investors already had high expectations for an aggressive easing of monetary policy. In this sense it had become quite difficult for Kuroda to deliver any significant positive surprise. Indeed, there was a high possibility that investors would be disappointed by the actual outcome of the meeting, even if the resulting policies ultimately had the desired effect on the economy.
In the event, Kuroda appears to have pulled off a satisfactory result. In most cases he has placed the resulting policy at the top end of expectations and in some instances he has produced a mildly positive surprise. In particular, the extension of the duration for Japanese government bond purchases and the adoption of a two-year time horizon to achieve the inflation target suggest a fairly radical change of direction within the BoJ.
The resulting statement issued by the BoJ yesterday afternoon was strongly worded and had a significant impact on financial markets; the equity market gained around 4% in the 90 minutes after the announcement and the currency weakened rapidly by about 2.5% against the dollar – a huge move for such an actively traded cross-rate. Perhaps one reason for the positive reaction was the fact that the nine-member policy board was almost unanimous in its support for the changes announced, with only one dissenter on some specific issues.
This suggests that there has been some real change of thinking within the BoJ, and investors may therefore be able to look forward to further policy initiatives over subsequent meetings.
Given the extensive debate on this issue among politicians and financial market participants, almost every aspect of potential policy had been discussed at some point. However, the combination of policies adopted, the apparent change in attitude with the BoJ and the prospect of further changes to policy in the future was sufficient to produce a strongly positive initial reaction in markets.
To a large extent the bank can now be seen to have done its job in the near term and attention will shift to government policy and the issue of structural reform which is desperately needed in order to ensure that any nascent economic improvement can be translated into a long-term revival in Japan’s underlying growth prospects.
Nathan Gibbs is fund manager, Japanese equities, at Schroders
