BoJ Eases Boldly
The Bank of Japan surprised by the market by easing far more than consensus expectations. It delivered incremental easing on several fronts. First, the portion of the asset purchase program reserved for actual asset purchases was increased by JPY 10 trn, and virtually all of this will be dedicated to JGB purchases. Second, even more significantly, the bank released itself from a self-imposed restriction on the JGB tenors it is allowed to buy under the asset purchase program. Previously only JGBs with a residual maturity of two years or less were eligible, but the bank has now extended that limit to three years. Third, the bank had intended to complete its asset purchase program by year-end, but it has now extended it for another 6 months – out to June 2013. This does not signal a slow-down in the pace of purchases of course as the purchase target has also increased commensurately. Confusion reigned in the immediate aftermath of the announcement and USDJPY sold off after it initially appeared the asset purchase target had only been increased by JPY 5 trn. The source of the confusion arose because the bank redirected JPY 5 trn it had made available for 6m loans, and instead earmarked that cash for additional asset purchases, taking the total to JPY 10 trn. However, the net increase in available funding was only JPY 5 trn. We note however that demand for 6m BoJ cash had been underwhelming, and so by redirecting this largely unused pool of cash towards asset purchases instead, the bank has made better use of its firepower. USDJPY soon climbed when the details sunk in, but it eventually gave back all gains. Elsewhere, late during the US session, S&P downgraded Spain by two notches from A to BBB+, outlook negative. The agency warned that the country’s ‘budget trajectory will likely deteriorate’ and more national support may be needed for the banking sector. The Swiss KOF leading indicator for April is due, while retail sales figures are out throughout Scandinavia. Jordan and Carney of the SNB and BoC are on the wires, and the US Advance Q1 GDP release is due.
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UBS Investment Bank