Nikkei Drops But BOJ Sticks To The ‘Right Path’

Nikkei Drops But BOJ Sticks To The ‘Right Path’
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Japan’s central bank that produced some massive measures earlier this year to get the economy out of the two-decade stagnation, was expected to come up with similar path breaking measures to soften the volatility in the Japanese bond market. But instead, the bank simply took an easy path by upgrading its economic assessment.

Nikkei Drops But BOJ Sticks To The 'Right Path'

Nikkei: Disappointed markets

The measures, which came as a disappointment for investors and experts, was enough to pull the bench mark Nikkei stock index down by 1.5 percent to close at 13,317.62. However, the decline was less sharp from the previous day’s gain of 4.9 percent owing to an upward revision of first-quarter economic data. In line with the equities, Yen also registered impressive gains with the dollar down 1.8 percent to 97.05 yen.

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Contagious effect on global markets

The fall in Japan’s Nikkei contributed in part by a stronger Yen, had contagious effect on other Asian markets and also on the European market. This has been a general trend in the past few weeks, when global markets take the idea from the developments in Tokyo. The FTSE 100 index in Europe was down 13 percent while Germany’s DAX lost 1.6 percent. France CAC-40 also shed 1.5 percent.

Thailand’s SET Index lost 5 percent while Jakarta Composite lost 3.5 percent. South Korea’s Kospi recorded a new seven-week low.

No major policy updates

Bank of Japan in the policy update continued with the asset-buying and other policy elements, as were previously announced.

BOJ announced not to increment its $1.4 trillion stimulus program that was announced in April. BOJ’s governor Haruhiko Kuroda told that the bank will step in with fresh steps if the borrowing costs spike again. The central bank believes that the bond market has stabilized, so there was no need for new measures.  The BOJ kept the annual pace of 60 trillion ($605 billion) to 70 trillion yen supply of money, announced in April unchanged.

One of the reasons for lack of fresh measures may be the data released on economic growth that showed better and faster economic growth with increasing current account surplus and rise in lending.

Analyst take

As per Danske Bank analysts, BOJ has done itself a favor in the long run by keeping the measures unchanged. The economy is on a right path, and the correction in the equity market should not be considered as a threat but as a recovery. Despite not coming out with any major announcements, “BOJ is still easing aggressively.”

In the coming months, significant amount of liquidity will continue to be pumped in the economy and “monetary easing is still at an early stage” they added.

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