Yen drops and Nikkei rises as BoJ delays tightening; markets mixed

HONG KONG, China — The yen fell and Tokyo stocks rose Friday after the Bank of Japan deferred a plan to cut back its bond purchases as it cautiously moves away from its ultra-loose monetary policy.

Stock markets had a mixed reaction to the decision, with investors also contemplating the outlook for US interest rates as data indicated inflation on a downward trajectory, even as the Federal Reserve lowered its outlook for how many cuts it would make this year.

The Bank of Japan, as expected, said it would pare its bond-buying activities — put in place to keep borrowing rates down to boost the economy — but added that it would make a final decision on the plan at its July meeting.

READ: Bank of Japan to scale down huge bond-buying program

The BoJ has been considering its next move to normalize monetary policy after years of keeping borrowing costs at minuscule levels, most notably by lifting interest rates out of negative territory in March — the first hike in 17 years.

Officials did not lift rates Friday but the reduction of bond holdings — known as quantitative tightening — had been seen as the next move, with the weakness of the yen also playing a role in discussions.

However, traders had expected it to begin winding down its purchases immediately and were left disappointed by the announcement.

The news sent the yen down to more than 158 to the dollar, having been around 157.20 before the decision. But the prospect of lower borrowing costs lifted the Nikkei stock index.

34-year low

The unit has been under continued pressure against the greenback owing to the bank’s refusal to move from its ultra-loose policy, even as other central banks hold rates at multi-year highs.

That saw it hit a 34-year low of more than 160 per dollar, prompting Japanese authorities to step into forex markets to provide support.

“The market is definitely not taking it as a step in the right direction, judging from the immediate reaction in the yen,” said Andrew Jackson of Ortus Advisors.

“I don’t think there was too much expectation priced in for this, but it’s pretty obvious that they need to be cutting back on their JGB purchases faster than they are signaling to the market.

“If they don’t do this, and continue with currency intervention, it’s a huge, unnecessary waste of money.”

Equity traders had been keeping a close eye on the announcement as any tightening would lift Japanese yields and push up rates, making assets more attractive to anyone looking for better returns.

READ: Bank of Japan ends negative rates, closing era of radical policy

In other markets, Hong Kong, Sydney, Singapore, Wellington, Manila, Bangkok, and Jakarta all fell, though there were gains in Shanghai, Seoul, Taipei and Mumbai.

The BoJ announcement comes after the Fed this week lowered its forecasts for interest rates this year to one, from three predicted in March.

Markets look at two cuts before January

But while decision-makers see borrowing costs being higher in January than previously thought, analysts said optimism that prices were being brought under control provided some support. Markets are looking at two cuts before January.

The latest sign that was the case came on Thursday, with news that the producer price index had dropped in May, reversing a rise the month before and confounding expectations for a small increase.

READ: US wholesale prices unexpectedly dropped in May

Several categories the Fed uses to calculate its favoured inflation gauge, the personal consumption expenditures price index, also softened.

“The latest data in hand nudges the door a little wider open for the Fed to begin making an interest rate cut later this year,” Comerica Bank’s Bill Adams said. Comerica sees the Fed cutting in September and December.

The euro remained under pressure as investors nervously awaited the snap French polls at the end of this month and the start of July, called by President Emmanuel Macron after his party lost to the far-right in last weekend’s EU elections.

The move has sparked a period of political uncertainty in Europe’s second-biggest economy and came as other leading nations come to terms with the vote that saw a shift away from the center across the bloc.

Paris stocks fell at the open, while London and Frankfurt rose.