Thursday, April 28, 2016

Japan Unsettles Global Markets - Havoc Spreads

Bank of Japan announced it's monetary policy today -  that announcement brought tsunami in local and global markets. What did Bank of Japan(BoJ) do to unsettle global markets so much that bulls had no place to hide? Long trades were decimated in all markets from Asia to Europe to America.

In Japanese markets there was bloodbath with Nikkie225  losing 624 points, down 3.6%. So what did Bank of Japan do in it's policy announcement that horrified the investor community and made them dump everything in sight? Bank of Japan took following monetary policy decisions:-
  1. BoJ kept its Deposit Rate unchanged at -0.1%.
  2. BoJ maintained it's Asset Purchase target at 80 trillion Yen (USD 738 billion as of current conversion rate). 
  3. It gave some relief to quake hit areas by offering zero interest rate loans to those areas.
Result of BoJ Inaction: 
After the announcement by BoJ, Yen roared into super-drive and strengthened from 111.88 to 108 against US Dollar. Presently it is trading at 108.5 as of going to press. 

Japanese economy is export oriented and hence Yen gaining so much strength against US dollar means that export of  Japanese companies will no longer be competitive. That will directly hit the top line of companies, finally effecting their bottom line.

What was wrong with BoJ decision?
Will someone please tell me what was so terribly wrong with BoJ decision. It basically did not alter anything from what existed since February 2016. Maybe it was scared to shake the equilibrium in the market as it existed. And look what it achieved - just the opposite!.

Why did BoJ keep rates unaltered?
BoJ thought not to change anything because it got scared of consequences. When it decreased Deposit Rate from +1% to - 1% last February, a sharp drop occurred in stock prices. This time around it did not want to take the blame of upsetting the market. And yet it did!

What did market want from BoJ?
We live in bizarre times. Negative deposit rates mean that if you deposit money with Central Bank, you will have to pay for it and not get paid.. 

Did market participants want further cut in deposit rates? I don't think so. That would have been disastrous for Yen- Dollar trade. Japanese exports would have got further hit.

Did market participants want BoJ to increase deposit rate to pre-February rate of +1% ? That would have effected liquidity. Entire exercise of negative rates was meant to spur growth for Japanese economy so that it can come out of decade long stagnation.

Maybe market participants wanted BoJ to decrease the borrowing rates to negative territory. That would mean that you get paid for taking loan from Central bank. Point to ponder!

Illogical Market Reaction
Japanese companies are effected and so is Japanese economy. Economy will shrink and deflation will take roots. But that has been the state of this third largest economy of the world for nearly two decades. How does that effect global economy?

Global economy has been chugging along despite Japanese stagflation for years. What has materially changed in global economy with today's inaction of BoJ ? Then why such a violent reaction in global markets to BoJ decision? I have no answer. If anyone reading this can provide an answer, we all will get educated. Hit the comment button at the bottom of this post freely.

As of now Dow is trading 58 points down. US market participants have reacted more maturely to news from Japan. May be it will make rest of the world think and act logically tomorrow.

Sun is finally setting in the land of rising sun. That is a reality and we have to come to terms with it - earlier the better.