BOJ “Spaghetti Throw” Underwhelms

Here’s the problem: This is basically fiddling around the periphery, rather than doing anything new and radical. The BOJ did NOT raise the size of QE, a tacit admission in the eyes of many observers that even the BOJ realizes it is distorting markets too much and destroying market liquidity. The BOJ did NOT cut interest rates further, a tacit admission that even the BOJ knows NIRP doesn’t work. And the BOJ’s rhetorical flourish – that it will try to “beat” 2% rather than “meet” it – is downright laughable. The BOJ hasn’t hit its 2% target in the entire three-and-a-half-year period that it’s been doing all this stuff. As a matter of fact, core consumer prices in Japan fell in July at the fastest rate since Haruhiko Kuroda became the head of the BOJ in early 2013. So just by saying it wants to beat 2%, markets are supposed to magically believe they will? Ha! 

Japanese yen futures initially sold off. But they have completely retraced that initial sell off, and are now up sharply on the day. In other words, rather than weaken as the BOJ wants it to, the yen is strengthening again. If we take out the 1.00 level on this chart (recently trading at 0.9926), it’s going to be a YUUUGGEEE event for the currency and equity markets. Obviously, a lot will depend on what the Fed does or says later today. Stay tuned!