Well that’s embarrassing. Like a complete chump, I fell for the “Kuroda will once again over deliver” story. Yet not only did Kuroda fail to over deliver, he whiffed so badly traders are wondering if the King of Monetary Ease has lost his touch.
Instead of meeting expectations with further easing, the Bank of Japan completely passed at last night’s meeting and did nothing. No change. The damage to the markets was immediate and brutal.
The Yen chart looks much the same as the Nikkei:
To understand the violence of this Yen move, I stole a terrific chart made this morning by Bloomberg TV’s anchor Matt “I really like Mcdonald’s breakfast for lunch” Miller and his partner in crime Hilary Queen of Chartz:
I have expanded the time frame to include all the periods since Abeconomics was introduced. There were only three days where the Yen rose as much as it did this morning. Don’t forget this includes various days where global financial market sell-offs caused big Yen rallies.
Last night’s move was unusual because it wasn’t a Yen rally in the midst of a monster risk off move. Instead it was a stand alone rip your face off Yen spike.
So what the heck happened?
This morning I saw The Reformed Broker Josh Brown poking fun at all the traders ranting about Kuroda’s move:
I will try to avoid the diatribe, but given the oversized market reaction to Bank of Japan’s meeting, it would be foolish to not at least attempt to understand what happened.
At the end of January, Kuroda surprised the market with an out of the blue move to negative interest rates (right after he promised he wouldn’t - EXPERT LIARS). Unfortunately the market did not take it well, and in the process the Yen rallied from 121 to 108 and the Nikkei declined from 17,800 to 15,000.
About a week or so ago, there were various signals floated by Japanese officials which indicated the Yen’s strength was unwelcome and would be met with a policy change. I won’t bother going through all the examples, but there is no doubt in my mind that certain Japanese officials were keen to stop the Yen rally and gave strong hints which suggested policy would reflect that reality. The market ate it up hook, line and sinker. Goldman even went as far to suggest the Bank of Japan would aggressively expand both fiscal and monetary policy stimulus. Traders, who had previously learned that Kuroda promised a lot, but delivered even more, had sugar plum dreams in their heads as they bought Japanese stocks and sold Yen.
And so when the Bank of Japan chose to stand pat at last night’s meeting there were piles of disappointed traders who had set up for the exact opposite. At the very least they expected Kuroda to meet expectations. Not only did he fail to do that, but he did nothing new! All of that talk about the “unwelcome” Yen strength was nothing more than talk.
The next move
Now that we know how we got here, what are the ramifications from this latest development? To answer that question we must first understand why the Bank of Japan took a pass.
At the risk of embarrassing myself again with another terrible BoJ call, I will lay out my theory on what happened. Kuroda, Abe and the rest of the Japanese administration were indeed keen to increase stimulus at this last meeting. But don’t forget the Bank of Japan is a committee. It’s supposed to be independent.
At the previous meeting when Kuroda moved to negative rates, there were four dissenters in the committee of nine. He was barely able to pass it. And I am not sure, but I think I recall a couple other previous important meetings having close votes. Kuroda is powerful, but by no means omnipotent.
I think Kuroda simply didn’t have the votes to pass another easing measure last night. Realizing he couldn’t get his desired stimulus measures through committee, he gave up and purposely did nothing. He wanted the market to react the way it did. He wants to force the hold outs around to his way of thinking.
The problem with this sort of game is that it risks having the deflationary vicious circle take root too firmly. The market will assume the worse and make the needed necessary Central Bank reaction all the greater.
Like it or not, that’s the world we live in. As traders we end up trying to guess the actions of Central Banks who are themselves using the markets to influence their desired outcomes. It’s kind of pathetic, but that’s reality.
I worry the path of least resistance for USDJPY and the Nikkei will both be down (stronger Yen) until the BoJ caves. Over the past few years when a Central Bank has refused to act, the market has kept pushing the position against them until they can’t take the pain. It happened with the ECB, the Fed, and I see no reason to think it will be any different with the BoJ.
What scares me over the short run is that the Japanese are on vacation Friday, Tuesday, Wednesday and Thursday.
It wouldn’t surprise me one bit to see the Yen hit new highs in the next week. Whether this will translate into a global risk off move is still up in the air, but I am nervous enough I am buying some short term puts on the S&P 500 for a trade. Volatility is too cheap, and I think the wall of liquidity buoying markets might have been more influenced by Japan than most traders realize. It’s worth a punt on the dark side. I am prepared to have them expire as dust, but I no longer feel comfortable without some protection.
But the better trade is to buy gold. Bit by bit these Central Bankers are losing their credibility. This BoJ move is just another step in that direction.
Thanks for reading,