BOJ Moves, Market Yawns

In the face of a deteriorating economy and stubborn deflation, the Bank of Japan extended its assets purchase plan, but the bears had been hoping for more and they bought back the previously sold yen.  

The BOJ announced that it would increase its asset purchases by JPY11 trillion.  The consensus was for JPY10 trillion, though there had been some talk of as much as JPY20 trillion.  

These new purchases will consist mostly of Japanese government bonds (JPY5 trillion) and discount bills (JPY5 trillion).  The BOJ will increase its alternative assets, ETFs, REITS and commercial bonds by a total of JPY1 trillion.
 

There are three additional elements, two of which make the program appear more aggressive and one that doesn't.  First, there had been some expectation that the BOJ would extend the duration of its QE operation into 2014.  It did not.  This means that pace of purchases will be somewhat more rapid than anticipated.   

Second, it also announced a program that ties new lending with lower funding, trying to square the same circle as the Bank of England in this.  The BOJ announced it will provide unlimited financing to banks at low rates equivalent to their increase in lending.    

Third, and less ambitious, the Bank of Japan did lower its growth and inflation forecasts but the mild adjustment still suggests a lack of urgency.  Growth for the current fiscal year was cut to 1.5% from the July forecast of 2.2%.  Growth in the fiscal year beginning March 2013 is forecast to roughly the same at 1.6%.  With a shrinking population, this still points to an increase in per capita GDP.  

The BOJ revised down its forecast for CPI from +0.2% to -0.1% for the current fiscal.  However, the BOJ anticipates slaying the deflation dragon in FY13 and projects CPI to rise to 0.4%, about half the pace that it had previously anticipated. 

Although it is the first time the BOJ has eased in two consecutive meetings in nearly a decade, it seems that the economy is deteriorating even faster. Consider the data that was released prior to the outcome of the BOJ meeting.  

• The unemployment rate was unchanged at 4.2% in September, but the job-to-applicant ratio deteriorated to 0.81 from 0.83.  
• Overall household spending collapsed in September, falling 1.9% on the month and bringing the year-over-year rate to -0.9% from 1.8% in August.  The consensus was for a 0.8% increase. 
• Industrial output slumped 4.1% in September,the third consecutive monthly decline and the biggest since last March's tragedy  The decline is about a third larger than expected.  The year-over-year rate dives to -8.1% from -4.6% in August.  The consensus was for a -7.1% year-over-year contraction.   

The yen had been offered ahead of the BOJ's announcement, with the dollar rising just above JPY80.10.  The announcement saw it quickly drop to about JPY79.25.  The greenback stabilized near JPY79.50, around the 200-day moving average and pre-weekend and yesterday's lows. 

More broadly, the dollar is trading heavily across the board, not just against the yen.  In fact, the yen's strength has been largely matched by the euro and the Australian dollar, leaving the yen little changed on the crosses.  Sterling is lagging a bit.  The euro had found good technical support for three sessions running now just ahead of $1.2880.  Short-term players appear to have thrown in the proverbial towel and looking at the long side again as the path of least resistance.