USD/JPY: Yen Gains Against Dollar as Bank of Japan Keeps Rates Steady, Plans Big ETF Sales

No surprises on rate decision. But the bank’s move to start unloading its balance sheet shocked Japanese stocks and sent the yen higher… briefly.

💪 Yen Strenghtens on BoJ Plans

• The USDJPY pair shifted lower early Friday after the Bank of Japan said it’s keeping interest rates unchanged at 0.5%. The move was widely expected as Japan continues to struggle to get its economy off the ground.
• While there wasn’t any talk of rate hikes (something many are secretly hoping for), Japan’s central bank said it’s planning to start unloading big chunks of the exchange-traded funds it's holding on its balance sheet.
• How much exactly? About ¥335 billion ($2.4 billion) of ETFs and real estate investment trusts (REITs) a year. The BoJ has been purchasing ETFs and REITs for about 15 years as a way to ease its monetary policy and beat deflation. The book value of these holdings on the balance sheet is currently at ¥37.1 trillion ($250 billion).

👀 Reactions Across the Board

• The Japanese yen initially shot higher, sending the dollar-yen lower by 0.3% to ¥147.20. The pump was short-lived and before the European session kicked off the pair was back near breakeven for the day.
• Japanese stocks immediately dropped when the news got out with the Nikkei 225 NIKKEI sliding more than 1.6% for the day.
• Apparently, the shock reaction was more or less contained. The Bank of Japan has long been expected to do something about its ultra-loose monetary policy. If policymakers are reluctant to hike rates, then unloading the balance sheet might be the next best thing? Not exactly.

🎁 Time for a Fresh Perspective?

• The plans to offload the balance sheet weren’t supposed to happen right now. Some see this as a sign that members of the central bank committee are getting impatient and looking for ways to start unwinding the easy policies that have made the country go for decades.
• In fact, two members voted to hike rates while seven members opted for a hold. The internal disagreement sparked speculation that the bank could be tilting toward a hike by the end of the year.
• Analysts are quick to point out that the pressure to move is already there – at least two members will likely vote for the hike at the next meeting.
• The BoJ’s rate decision came after the Federal Reserve lowered interest rates on Wednesday and after the Bank of England kept rates steady Thursday with two dissenting voices wanting a cut.