Bank of Japan surprises markets by holding off on more stimulus; yen soars and shares dive

People walk on a street in front of the Bank of Japan headquarters in Tokyo, Japan, on March 31, 2016.
People walk on a street in front of the Bank of Japan headquarters in Tokyo, Japan, on March 31, 2016.PHOTO: REUTERS

TOKYO (BLOOMBERG, AFP)- The yen soared against the US dollar and the Nikkei share index dived on Thursday (April 28) after the Bank of Japan surprised markets by holding off on fresh stimulus while it pushed back its timeline for hitting a 2.0 per cent inflation target.

The US dollar plunged to as low as 108.77 yen, down more than 2 per cent from 111.78 yen earlier in the day, while the Nikkei stock index tumbled 3 per cent, having gone into the lunch break 1.4 per cent higher.

Markets had widely expected new measures to counter a downturn in the world's number three-economy. Speculation had picked up pace after Japan published another set of weak data on Thursday morning.

Instead, BOJ governor Haruhiko Kuroda and his colleagues opted to take more time to assess the impact of negative interest rates. They are betting that their success in bringing down borrowing costs since unveiling the negative-rate strategy in January will generate an acceleration in lending.

Board members on Thursday left unchanged three key easing tools -- the 80 trillion yen target (S$987.9 billion) for expanding the monetary base, mostly through bond purchases, the 0.1 per cent negative rate on a portion of the cash banks park at the BOJ, and a programme to buy riskier assets including stocks. Separately, they postponed their time frame for reaching a 2 per cent inflation target, for the fourth delay in about a year.

Mikihiro Matsuoka, chief Japan economist at Deutsche Bank AG, was one analyst who foresaw no action at this meeting, writing in a report on April 18 that the BOJ could hold firm on policy because "the financial market has been in a lull in the last few weeks, with a stabilizing stock market and a pause for" yen appreciation.

"We do not believe these developments will force another round of easing just three months after the introduction of the negative interest rate, as long as its effects on the economy and the financial market are still unknown," he wrote.

The yen jumped after the announcement amid disappointment that policy makers stood pat. Even so, the decision is in keeping with past practice, when Mr Kuroda opted to give time to see the effects of his actions. His unprecedentedly massive stimulus has -- since it began in April 2013 -- helped to support bank lending, which has reached its highest level since 2002.

Where the BOJ has had less success is stoking growth and consumer prices, with companies limiting wage gains and investment spending. Behind Japan Inc's lack of ambition on the domestic front: a shrinking customer base as the nation's population declines, and a currency market that has demonstrated a cheap yen may not be around for the long haul. Kuroda and other BOJ officials expressed concern this month that the yen's appreciation this year could damage corporate sentiment.

Japan's gross domestic product contracted in the final three months of 2015. Deutsche Bank predicted that the economy shrunk in the first quarter of 2016, which would translate into two consecutive quarters of contraction - the definition of a recession.

Hours before the BOJ announcement, economic data for March underlined the struggle policy makers are having to fan reflation. Consumer prices excluding fresh food dropped the most in three years, household spending slid and industrial production capped a soft rebound for the first quarter after declines in the second half of 2015.

With monetary policy on hold, attention now turns to the Abe administration and discussions of a supplementary spending package to help shore up growth. Prime Minister Shinzo Abe also has yet to decide whether to postpone a sales-tax increase scheduled for April 2017, as several of his advisers have urged.

One constituency that may be pleased with Japan's inaction is its overseas trading partners. US Treasury Secretary Jacob J Lew earlier this month signaled there was no cause for Japan to intervene in the currency market - something it hasn't done since 2011 - to address yen gains. South Korea has in the past been vocal at expressing concern about a cheapening yen.