Why BOJ is right in disappointing market expectations

After Bank of Japan (BOJ), kept its policy on hold against popular expectations, Yen strengthened more than 450 pips against Dollar, which is considered as an economic threat, which relies heavily on exports.

So, did bank of Japan (BOJ), wronged the monetary policy by not acting?

We feel to the contrary, it has done the right thing or rather has chosen a sensible path. Reasons are simple –

• Competitive devaluation is barred according to the agreement between G20 nations. So acting to weaken Yen and benefit its export sector would have been some kind of valuation.
   
• However, BOJ could have easily justified its action, since latest CPI reading showed Japan once again dipped into deflationary territory. But as of now, financial market volatility has subsided and many of the commodities have started increasing. Oil is up close to 20% YTD, so it makes more sense to wait it out.

• Last time, it didn’t work. Yen strengthen despite BOJ actions, there was no way to be sure that this time would be different.

• Dollar is on a weakening path, until that reverses, Yen may strengthen despite actions. So better wait for Dollar reversal or next FED hike to watch what happens.

• Each action is coming with diminishing return. So further actions would have made BOJ weaker as its tool box would have become emptier.

• Market was heavily anticipating actions, so element of surprise wasn’t there. So it could have become buy the rumor, sell the news in Yen.

Yen is currently trading at 107.4 per Dollar.