BOJ easing to ‘dominate’ markets

Instreet Investment managing director George Lucas said Japan’s unexpected policy easing will dominate investment markets for the next week.

In addition to the BOJ’s announcement, there is renewed optimism about the pace of US interest rate rises, Mr Lucas said.

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“There is now an expectation that the US Federal Reserve will only raise interest rates twice this year,” he said.

“We also saw a strong rally in oil prices. Brent rose eight per cent to a three-week high.

“The rise in oil prices came as Russia said it was willing to discuss the possibility of coordinated cuts to crude output with Opec.”

But the BOJ’s actions are likely to dominate markets for the “next week or so”, he added.

“[The Bank of Japan] has unexpectedly adopted negative interest rates, following in the footsteps of the European Central Bank, Swiss National Bank and Swedish Riksbank (among others),” Mr Lucas said.

“Compared to others, the BOJ’s negative rate scheme is relatively diluted and seems to be more about providing a signal to the markets. This is especially for FX markets with the Japanese Yen (JPY) weakening significantly in response.

“Central bankers are finding that monetary policy is better executed through currency rather than domestic interest rate policy. Of course, not everyone can have a weaker currency – for example, if the JPY weakens then the US dollar will be strengthening,” he said.

It’s difficult to see a solution to Japan’s problems of low growth and high public debt that doesn’t involve a much weaker currency, Mr Lucas said.

“Further depreciation of the Yen will provide a major boost to Japanese equities, which suffered during the recent market turmoil thanks to its close ties with China and the “safehaven”-related rebound in the JPY against the US dollar and euro,” he said.

“As such, it’s likely we’ll see more currency-weakening policies from the BOJ.”