BoJ to step-up easing in H2 2015

The Bank of Japan kept its massive stimulus programme unchanged on Tuesday by 8 to 1 vote despite falling inflation rate, suggesting that it still believes that prices will resume their strength later in the year, without any additional measures.

The bank said that it will conduct money market operations to help expand the monetary base at an annual pace of about 80trillion yen.

"Our quantitative and qualitative easing policy is exerting its intended effect," BOJ Governor Haruhiko Kuroda told a news conference after the meeting. "There's absolutely no change to our stance of aiming to achieve our 2 percent inflation target at the earliest date possible with a timeframe of roughly two years".

However, the bank revised its inflation outlook downwards, citing falling oil prices as the reason behind weakening of inflation. Kuroda said that the drop in oil prices could temporarily drag country's consumer prices into negative territory but stressed that the policy is in place to end nearly two decades of deflation and sluggish growth.

 "The BoJ is admitting that consumer prices could fall, while indicating that it's not planning steps to counter that," said Koya Miyamae, an economist at SMBC Nikko Securities Inc. "The shift cements a view that the BoJ won't add stimulus for a while. They are likely to defend their position by pointing to encouraging signs in the wage talks and an expected fading impact of oil on consumer prices."

Economists expect the central bank to step up the pace of easing in the latter half of the year as cheaper oil will exert downward pressure on household inflation expectations.

"The BOJ will likely increase the asset purchasing program in the second half of this year, particularly with low oil prices exerting a lot of disinflationary effect on the consumer price index which makes it harder for them to reach their target," said Stephen Sheung, head of investment strategy at SHK Private.

USD/JPY was largely unchanged at 121.38 on the news and has been consolidating between 120.60 and 122.02 for the past four trading sessions. Short term trend is bullish as long as support 120.48 holds. On the downside minor support is around 121 and any break below will target 120.50 /119.90. The pair's minor resistance is around 122.20 and above that level it will reach 123/124.13.

"USD/JPY: 121.30 - 121.52 overnight range. BoJ meeting a non-event. Large option expiries at 121.00 ($930mn), 121.75 ($700mn) and 122.00 ($612mn) keep spot rangebound. Tighter US/JA 2y spread (77bp) and US data misses cap upside", said Societe Generale in a note.