It’s Deja Vu in Japan Markets as Kuroda Inaction Is Punished

Six Step Plan for Successful BOJ Intervention
  • Yen jumps, stocks decline after BOJ’s policy decision
  • Majority of economists had expected no change this month

Once again, investors are sending Haruhiko Kuroda a message that doing nothing won’t do.

The yen’s surge and the Topix index’s slump, both among the most dramatic moves in global markets this year, intensified Thursday as the Bank of Japan Governor held off on adding to the central bank’s asset purchases or extending its foray into negative interest rates. Investors were similarly jolted in April, when Kuroda stood pat and the yen soared 3 percent.

The lack of action comes amid a slump in global equities and a retreat to haven assets such as the yen as concern mounts that Britons may vote to leave the European Union on June 23. The referendum is the latest source of volatility in a year where central bank stimulus has lost its sway over markets.

“The BOJ was facing too much of a headwind,” said Yunosuke Ikeda, head of Japan foreign-exchange research at Nomura Securities Co. “Even if the BOJ had come out with additional stimulus expansion, it would probably not be able to fight this headwind, making such steps ineffective. Ineffective easing would just question their credibility, so they probably decided not to act this time.”

Yen, Stocks

The Japanese currency gained 2.3 percent to 103.67 per dollar, a level not seen since August 2014, while the Topix sank 2.8 percent and the Mothers Index of small-cap shares slid into a bear market. About 28 percent of economists in a Bloomberg survey had forecast additional easing at this meeting, with 55 percent looking to the next gathering on July 29. A majority had expected additional stimulus in April.

“The biggest problem of all remains the yen, which can certainly strengthen a little further from here,” George Boubouras, chief investment officer at Contango Asset Management in Melbourne, said by phone. “The currency issue will be the one that continues to create the uncertainty and volatility for Japanese equities.”

Earlier, the Federal Reserve kept interest rates unchanged and signaled a slower approach to increases. Fed officials expect the central bank to raise rates more than once this year, with Britain’s June 23 referendum on membership of the European Union “one of the uncertainties that we discussed and that factored into today’s decision,” Chair Janet Yellen said at the end of a two-day policy meeting on Wednesday.

The BOJ will carefully monitor the impact of the Brexit vote, Kuroda said at a press briefing Thursday afternoon in Tokyo. Some time is needed for negative interest rates to impact the economy, he said, while noting that the central bank would add to stimulus if needed.

Topix Tumbles

Japan’s Topix share index has tumbled 20 percent this year, the second-worst performance among 24 developed markets tracked by Bloomberg. The yen has gained about 16 percent against the dollar.

Foreign investors have been retreating after flocking to Japan in the early years of Prime Minister Shinzo Abe’s program known as Abenomics, when unprecedented bond buying sent the yen tumbling and spurred a world-beating rally in Japanese shares. This year, Kuroda’s attempts to reach a 2 percent inflation target are bearing little fruit, and even negative interest rates haven’t stopped a surge in the currency. Not only that, the economy is stuttering, forcing Abe to delay a planned sales-tax increase and consider a fiscal stimulus package.

Still, for Mitsubishi UFJ Morgan Stanley Securities Co., any move by Kuroda this week wouldn’t have worked for long anyway.

“The BOJ’s decision today to maintain the status quo was the right decision,” said Norihiro Fujito, a strategist at the brokerage. “They would have run the risk of playing the few cards they have left, and seeing the effects die out in a short period of time. I think they made the right call."

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