The Bank of Japan added another JPY 10 trn to the target size of the Asset Purchase Program, with JPY 5trn of this earmarked for JGBs and the remaining JPY 5 trn for T-bills. The yen failed to weaken however given the inflation goal was left unchanged at 1% (in spite of recent political pressure for it to be raised). There was some modest movement on that front however, with Governor Shirakawa indicating that the goal will be reviewed at the upcoming Jan 21-22 policy meeting − so USDJPY bulls are not likely to be overly discouraged by today’s events. They can also take comfort from the fact that a single dissenting vote was cast in favour of cutting interest paid on excess reserves to 0% (from 10bp currently). The 10bp acts as a floor on the JGB curve and, were it ever to be lowered or removed, front-end JGB yields would promptly fall sharply sending USDJPY significantly higher. The motion was rejected 8 votes to 1, but it is the first time a board member has advocated such a cut since the facility was introduced in Nov 2008, and others may eventually be won over by the idea.
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| positive corelation between NIKKEI index and USDJPY |
