Bank of Japan offers a dose of cheer to stock markets

Men walk toward the Bank of Japan (BOJ) building in Tokyo, Japan, on Sept  21.
Men walk toward the Bank of Japan (BOJ) building in Tokyo, Japan, on Sept 21. PHOTO: REUTERS

Shift in focus of stimulus programme signals that central bank still has some bullets left

Most markets in Asia perked up after the Japanese central bank surprised investors with a new approach to revive the world's third- largest economy.

The Bank of Japan (BOJ) yesterday pledged to keep its stimulus programme going until inflation exceeds its 2 per cent target. This offered fresh hopes of a rebound to those who worried that central banks had run out of ammunition to support global growth.

While the Nikkei in Japan surged 1.9 per cent and Hong Kong gained 0.59 per cent, Shanghai edged up only 0.1 per cent. The Straits Times Index gave back gains it had recouped earlier to close 0.14 per cent lower. It was among the few bourses to miss out even as Wall Street and European markets took their cue from Japan and also opened brightly.

Investors were inclined to stay their hand yesterday until they hear the decision from the United States Federal Reserve on interest rates, with most tipping that there will be no rise this month. That decision was due out today at 2am Singapore time and could reinforce the feel-good factor at a time when many markets sorely need it.

BOJ's moves are seen as a shift away from merely expanding the supply of money in the economy - which had not quite worked - to controlling interest rates.

It decided to keep interest rates on hold at minus 0.1 per cent but left the door open for further cuts, and pledged to cap 10-year government bond yields at zero per cent, which basically means it is promising to buy any bonds offered for sale at that price.

The bank also said it will keep the scale of its quantitative easing programme - essentially money printing - steady at 80 trillion yen (S$1.08 trillion) per year, but added that the target may fluctuate as it tries to control borrowing costs.

"This is positive for the equity market, especially bank stocks," Mr Michael Moen, fixed income investment manager at Aberdeen Asset Management, told Reuters. "They have acknowledged the negative rate policy can hurt bank profits, and these measures they have announced today are in a way trying to offset some of that negative impact," he said.

But scepticism remains over whether the BOJ's moves will succeed.

Pledging to maintain asset purchases until inflation is above 2 per cent means that the BOJ will have to buy assets for even longer, and run deeper into liquidity constraints, HSBC's co-head of Asian economic research Frederic Neumann noted.

CIMB Private Bank economist Song Seng Wun said the crucial point will be whether the policy shift will spur Japanese inflation expectations, and in turn lead to stronger consumption and investment. More robust consumption in Japan will anchor Asian growth and have a more meaningful impact on Singapore's economy, he added.

The yen strengthened against the Singdollar yesterday - 100 yen was equal to S$1.3494 compared with S$1.3407 on Tuesday.

A version of this article appeared in the print edition of The Straits Times on September 22, 2016, with the headline 'Bank of Japan offers a dose of cheer to stock markets'. Print Edition | Subscribe