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Markets Shocked By Japan Changes - Analyst

posted 4 Apr 2013, 07:46 by Mpelembe   [ updated 4 Apr 2013, 08:20 ]

The Bank of Japan shocked markets with a radical overhaul of its policymaking, adopting a new balance sheet target and pledging to double its government bond holdings in two years as it seeks to end nearly two decades of deflation. Daragh Maher from HSBC says the markets didn't anticipate the scale of the changes.


"(QUESTION) It was quite a shock from the Bank of Japan. No great surprise, we're off about 2% for the year.) 

Yeah, I know it was impressive. We've become accustomed to the Bank of Japan underwhelming us. Got to admit, that's what we anticipated as well today. And when they've come in, they come in with some big steps. The monetary base expansion is big, they're going to double their holdings in JGBs, they're going to be out buying risky assets. There's a lot of elements that I think- okay, the market expected some of these initiatives but not the kind of scale that they've delivered. So yeah, absolutely just- 

(QUESTION: Is it going to do the trick? They got two years, or they set themselves two years.) 

Well look, they've increased the chance that they succeed but I still think ultimately, what we may end up within Japan is a stagflation-type environment - weaker Yen, perhaps short-term, gets inflation higher. But what you want is wages growth, real underlying demand. I'm not sure that this gets us there. I think that's where the skepticism will begin to emerge again in the coming months, I suspect.

(QUESTION: Got to mention, it makes your JPY80 yearend call look very challenging, to say the least, Daragh.) 

Yeah. I mean I think it does because we expected them to underwhelm. They haven't underwhelmed and I think what we moved to now really goes to your earlier question - do they succeed? And we think that if they don't succeed, then a lot of what we've built into this Yen will begin to reverse. 

(QUESTION: Okay, so a dovish surprise from the Bank of Japan. Are we going to get similar surprises from the ECB, Bank of England? Is that how the market is setting itself up?)

 I suspect that, yeah. It feels that, if you like, if the markets are flirting with anything, it's with that kind of idea. We've had softer numbers in Europe, does that mean we get a rate cut? I mean I suspect not, but that's how you're going to be positioned for that probability. So it's softer in Euro, I would have thought, through the morning, it's softer on Sterling. But then if we get no action in terms of the announcements, you possibly could see a partial reversal of those moves. 

(QUESTION: Were you surprised by - I guess, lack of any huge reaction over the past few weeks for the Euro vis-a-vis Cyprus?)

 Yeah. I mean slightly modest move. I mean we haven't moved from 1.35 to 1.28, if you like. If you think that in that kind of context, but you're right. But I suspect what's actually happening is the market's taken some solace from the fact that the bond markets - the peripheral bond markets have been reasonably well-behaved through this. Yes, the banks have come under some pressure but I think that's - the Euro move has been relatively modest. When you think that we have had softer Eurozone data, I suspect that's actually been more the driver than the Cyprus issue. I think this is effectively where we're seeing that slowdown. 

(QUESTION: Are you less comforted byMario Draghi and the ECB now than you were six months ago? Or does that "we'll do everything it takes" still stand for- )

 Well, I still think that works. Yeah, I still think that works because otherwise, if you've had a situation like the Italian election, you've had a situation like Cyprus, you would have expected that kind of self-feeding bond market problem to re-emerge. It hasn't. We've seen bond markets are very well-behaved in the periphery and I think therefore, that says, sorry, Draghi's still in play, the OMT is still in play in the background. It's still working. Even though he's not had to use it, he had, of course."