Is this a turnaround in Bank of Japan policy?

After the Federal Reserve and the European Central Bank, the time has come for a decision Bank of Japan. The Asian country's policy makers announced that the bank would now control its yield curve more flexibly. Interest rates remained unchanged. The yen strengthened in the first reaction, but in the following hours the USD/JPY pair rose again and this morning the exchange rate broke the level of 142,00.

Normalization of monetary policy?

Bank of Japan monetary policy parameters have not changed. The main interest rate is still at -0,1%. and the target yield on 10-year bonds remains at 0%. Kazuo Ueda - the governor of the BoJ - indicated that the ceiling for these "paper" at the level of 0,5 percent. will be now reference point, not a fixed limit. In addition, the institution announced a daily purchase operation of these instruments. At the same time, it was emphasized that this decision does not mean the end of the yield curve control program.

The BoJ seems to need to be convinced of a sustained rise in inflation before taking steps towards normalizing policy. The bank's policy makers believe the policy changes are technical in nature to ensure a continued "loose" stance.

The very decision caused the index Nikkei 225 lost 0,4 percent on Friday. and the yen eventually depreciated against the USD. The USD/JPY exchange rate, after falling to a level close to 138,00, quickly moved above 142,00. Yield on 10-year Japanese government bonds increased to almost 0,6 percent. although the performance of the yen suggests that the market does not interpret Friday's decision on monetary policy as the beginning of a restrictive process.

This may be due to the fact that the bank left its long-term inflation forecast unchanged at 1,6 percent. for the fiscal year 2025, which means that the entity does not expect to achieve the price growth dynamics target on a permanent basis. This was the condition of the BoJ governor, the achievement of which could allow to consider a significant change in Japanese monetary policy.

China's real estate investment decline

Tonight we got the PMI data from the Chinese economy. The figures suggest that growth weakened even further in July. The indicator for industry remained below neutral level 50 pts. fourth month in a row, although it slightly improved to 49,3 from 49,0 points. in June. The individual components indicate that overall demand has declined, although at a slower pace. The new orders sub-index was at 49,5 points. which still gives a value below the borderline level, but at the same time an increase from 48,6 points. in the previous reporting month.

New export orders performed very negatively (46 points). The non-manufacturing sector (services and construction) declined to 51,5 points. from 53,2 points in June. You can see that the demand generated by summer travel has not offset the overall slowdown in the sector. There is a clear decline in real estate investment. The construction industry suffered from unfavorable weather conditions (high temperatures and heavy rainfall). Everything indicates that further stimulus packages will be implemented in the near future, although the stimulus will not be introduced on a large scale.

At today's session Hang Seng up 0,65%, Asia Dow Index up 0,49%. and the Shanghai Composite is above the 0,46 percent mark.

Source: Łukasz Zembik, OANDA TMS Brokers