The Bank of Japan has decided to leave interest rates unchanged at -0.1% despite analysts’ predicting a further stimulus increases by reducing rates to -0.2%. The unexpected decision sent the Japanese Yen surging upwards and yields on 10-year bonds sore as investors were disappointed at the absence of further rate easing.
Rate remains at -0.1%
At the end of the BoJ two-day policy meeting to set measures and targets for the coming two-months, it announced early Friday morning that it will keep interest rates at -0.1%. Analysts’ had expected the rate to be lowered to -0.2 to tackle the issue of deflation in the Japanese economy.
The decision came as a surprise and disappointment to investors who had hoped for further easing through a reduction in the interest rate. Yields on 10-year bonds jumped a 9 point basis after the decision became public.
Bank of Japan promises further stimulus to tackle deflation
While leaving the benchmark policy rate unchanged, the Bank of Japan did state that it is prepared to add further stimulus to the economy in order to achieve its inflation target of 2%.
The agency committed to keep its expansion of the monetary base steady at ¥80tn per year and expanded its’ purchases of exchange traded funds from ¥3.3tn to ¥6tn. It also decided to double the size of its’ US dollar lending program to $24bn.
Data on Japan’s economic performance remain worrying
The decision to commit to further stimulus comes on the same day major data on the performance and inflation levels of the Japanese economy were released.
Inflation figures are still looking very unfavourable for the country’s economy. The Japanese Consumer Price Index ex-fresh food for June came in at -0.5%. The shows an increase of 0.1% in deflationary movement of price levels year on year compared to May’s figure and missed analysts’ estimates who believed the rate would remain unchanged to the previous month at -0.4%.
Overall household spending, which was expected to improve was down a staggering 2.2% compared to June 2015 figures. The figure missed analysts’ estimates by 1.9% and undercut May’s rate by 1.1%.
The unemployment rate improved slightly from 3.2% in May to 3.1% in June.
Retail trade improved by more than expected in June. With decline in growth of 1.5% compared to sales in the same month 2015, which represents an improvement to last month’s figure of 0.7%.
Japanese Yen continues its’ surge against other main currencies
In the aftermath of the results, the currency yo-yoed widely over following coming hours but on average gained in strength to reach its highest level against the dollar in over three weeks, with the USD/JPY standing at 103.323 at 12.54pm.
The JYP has been gaining strength across the past 12 months which has hurt earnings through exports of many Japan based companies, such as Sony who had to record on 74% losses in quarterly profits this morning. Effort to depreciate the Yen have so far been largely unsuccessful.