By Wayne Cole
SYDNEY (Reuters) – A look at the day ahead in European and global markets from Wayne Cole.
So after all the frenetic speculation and massive market pressure, the Bank of Japan (BOJ) has held the line on its super-easy stimulus policy.
The economic outlook was revised a little, with GDP forecasts nudged down and CPI inflation up a touch to 1.8%, but that was short of the 2% target that some had predicted.
This saw the yen down across the board and the dollar up 2.6% to 131.42 yen. Global bond markets breathed a sigh of relief and U.S. 10-year yields eased 8 basis points to 3.48%.
The BOJ will continue to buy bonds in whatever amount necessary to maintain its target for 10-year JGB yields at zero. The trading band remains at -0.5% to +0.5%, notwithstanding the fact yields have now nudged above the ceiling for four sessions in a row.
One subtle change was to rules for providing fixed-rate funds to markets, with the BOJ saying the rate charged on loans out to 10 years would be set “to encourage the formation of a yield curve that is consistent with the guideline for market operations.” It then offered to lend one trillion yen ($7.62 billion) at a fixed rate for five years.
It was unclear how meaningful this change would be, but the BOJ’s defiant stance did see 10-year JGB yields backtrack to 0.36% from an early high of 0.51%.
Analysts still suspect the BOJ will again have to buy a record amount of JGBs this month to maintain the ceiling. The bank already holds more than half of all JGBs, and 80% or 90% of some bond lines, a major reason the yield curve looks out of whack and dealers complain endlessly of a dearth of liquidity.
In a sense, the BOJ is the single source of liquidity as it really is the buyer of last resort right now. Perhaps the idea is to provide an escape route for investors to exit their long JGB positions at current prices, and avoid the deeper losses that would surely come when YCC is finally wound down.
That could be an awful lot of buying given the next policy meeting isn’t until March 10, but at least global yields seem to be trending downwards which could help ease the pressure.
An added twist for the March meeting is that the government is reportedly set to announce a new BOJ governor in February, ahead of Kuroda’s retirement in April, and some analysts assume it will be left to the new guy to reverse course.
Or, just maybe, the BOJ will go on buying until it owns all of the government’s debt, and them simply forgive it. It’s just an accounting entry after all.
Key developments that could influence markets on Wednesday:
– UK CPI for Dec seen easing a fraction to 10.5% with the core at 6.2%. U.S. retail sales seen falling 0.8% for the headline and 0.3% for the control group.
– Busy Fed diary with Bostic, George, Harker, Logan and Bullard all due to speak today. ECB policymaker Villeroy de Galhau speaks in Davos
($1 = 131.3000 yen)
(Reporting by Wayne Cole; Editing by Kim Coghill)