By Natalie R. – The Bank of Japan surprised the financial markets Tuesday by announcing a 35 trillion yen ($418 billion) monetary easing program as well as stating it would cut its key overnight call rate to a range of 0.0%-0.1% for the foreseeable future. It also launched a 5 trillion yen program to buy private and public sector assets.
The new monetary easing measures were taken in order to spur economic growth and to combat the unrelenting deflationary pressures. While markets were expecting some form of intervention to combat the ever rising yen, the extent of the monetary easing program caught investors by surprise.
Bank of Japan Gov. Masaaki Shirakawa stated that the decision to undertake additional monetary easing measures was based on a worse-than-expected outlook for the Japanese economy. The Japanese recovery was hurt greatly by the strong yen as the country’s economy is export driven and a strong domestic currency diminished the gains from this sector.
Unfortunately for the Bank of Japan, while it might have been the first central bank to act, as recoveries in industrial nations falter, it can be expected that several central banks will soon follow suite. The USD/JPY pair remained virtually unchanged following the surprise announcement as expectations mount the Federal Reserve will be the next to act, pumping money into the U.S. economy, negating Japan’s yen-weakening program.
The Federal Reserve has signaled last month they may announce the purchase of more Treasuries as soon as their next policy meeting on Nov. 2-3 in an effort to boost growth and reduce the unemployment rate which is hovering near 10% for the past year. Federal Reserve Bank of Chicago Governer, Charles Evans, reiterated this notion today by calling on the Fed to do more to charge up the economy, including a new program of U.S. Treasury bond purchases and possibly setting a higher inflation target.
While other Central Banks may not be looking into further quantitative easing measure, they are suspending their interest rate increases. The most notable recent example is the Reserve Bank of Australia which Monday, unexpectedly left its benchmark rate unchanged at 4.5% despite a widely expected increase to 4.75%.
It seems that the BOJ’s next move will depend on the Federal Reserve as well as other Central Banks among the G20 nations. With growth stagnating in the developed nations we may be at the beginning of what some analysts have nicknamed as a “monetary easing war.”
Forex Market Analysis provided by ForexYard.
© 2006 by FxYard Ltd
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