Despite weak inflation and household spending, central bank decides against fresh measures to stimulate economy, pushing the yen up

This article is more than 4 years old

This article is more than 4 years old

The Bank of Japan has surprised investors by deciding against any fresh market stimulus despite shocking data that underlined the huge problems facing the country’s economy.

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Although it kept its negative interest rate policy in place and voted to continue with its massive asset purchase scheme, the bank’s policymakers refrained from any extra measures to kickstart the stagnating economy.

The dollar plunged 2.35% against the yen following the news as investors clawed back trades based on the expectation of more easing that would have weakened the Japanese currency.

On the share market, the Nikkei fell sharply in reaction to the news and was down more than 3.5% at 7am GMT. Futures trading indicated that the major European bourses would open lower on Thursday morning.

Stock markets cross Asia had risen earlier on Thursday in expectation of more stimulus from the central bank, especially after figures showed that Japan’s consumer prices dropped last month by the most in three years.



In addition to the worse-than-expected fall – 0.3% in March – separate data showed household spending remains weak, although factory output rebounded.

The central bank maintained its pledge to increase base money, or cash and deposits in circulation, at an annual pace of 80 trillion yen ($730bn). It also left unchanged a 0.1% negative interest rate it applies to some of the excess reserves financial institutions park at the BOJ.



However, the BoJ did adopt a 300bn yen ($2.75bn) loan-supplying programme aimed at assisting banks operating in areas hit by this month’s earthquake in southern Japan.



“The market had clearly worked itself into a frenzy of expectations demanding that the BoJ take action and in retrospect that looks like a misguided view that failed to recognise the dilemma that recent economic dynamics have presented for the BoJ,” said Stefan Worrall, director of Japan equity sales at Credit Suisse in Tokyo.



“The market’s response is clearly one of disappointment but in the wake of the Fed decision the BoJ has perhaps taken the only sensible course of action by rightfully recognising that it’s the Fed and interpretations of Fed policy outlook that is responsible for the fate of the yen, which may yet weaken without further action from the BoJ if the US remains on the path to improvement.”

The world’s third-largest economy has largely defied several years of Bank of Japan and government remedies aimed at boosting prices as well as broader activity.



Adding to concerns about the economy, deadly earthquakes this month that killed dozens of people in southern Kyushu also sparked factory shutdowns that threaten to slam the brakes on growth.

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The economy shrank 0.3 percent in the last quarter of 2015 and there are concerns that the January-March GDP data will also come in weak.

The negative rate move – which aims to encourage lending by essentially charging banks for storing some excess reserves in BoJ vaults – was widely panned as a desperate move to save prime minister Shinzo Abe’s growth drive, dubbed Abenomics.



Abe swept to power more than three years ago vowing to revive Japan’s fortunes with a mix of policies centred on central bank monetary easing, targeted government spending and deregulation.

But his bid to power inflation has been hit by falling energy prices, coupled with recent robustness in the yen driving down the cost of imports.

The central bank has been ratcheting back its timeline for reaching a 2% inflation target, which was unveiled along with a huge asset-buying plan in early 2013.

The BoJ’s moves are a cornerstone of Abenomics, which has struggled to boost Japan’s lukewarm economy despite plenty of fanfare.

In a sign of growing unease over Japan’s economy, the International Monetary Fund this month cut its growth forecast for the country, saying GDP would shrink next year as a planned sales tax rise tightens consumer spending.

The IMF also said that deflation – a persistent and debilitating decline in prices that weighed on the economy for years – could return to Japan.