Bank of Japan has concluded a 3-month long policy review and announced results today. The Bank has decided to make changes to its ETF buying policy as well as widen the target yield band. The announcement boosted Japanese yen and pushed Japanese Nikkei 225 index (JAP225) lower.
Target yield band
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Create account Try a demo Download mobile app Download mobile appBank of Japan left interest rates unchanged but announced that it will adopt a 0 +/- 0.25% target yield band for Japanese 10-year government bonds. While BoJ did not have an official target yield band earlier, it is believed that the Bank had a yield band of 0 +/- 0.20%. Given that recent moves in yields have been upward, the announcement can be seen as somewhat hawkish as the Bank will allow market rates to run higher before intervening. 10-year Japanese yield sits at around 0.11% currently after reaching a local high of 0.16% at the beginning of March. However, at the beginning of the year, yields in Japan were as low as 0.02%.
ETF buying
It looks like the most meaningful change was made to ETF buying policy. Bank of Japan said that it will drop its annual 6 trillion JPY ETF buying target while maintaining a 12 trillion JPY ceiling. This means that the Bank has removed a lower limit on its purchases and may start buying less than 6 trillion JPY of ETFs per year. BoJ has also responded to criticism over its growing role in the Japanese stock market (ownership concentration) and said that it will no longer purchase Nikkei 225 ETFs and instead focus on broad Topix index.
Market reaction
Markets reacted to BoJ policy change by sending Japanese yen higher and pushing Japanese stocks lower. The biggest reaction was spotted on Nikkei 225 (JAP225) with the index plunging 1.41%. Topix index finished the day 0.18% higher.
JAP225 failed to retest recent highs and plunged back below 30,000 pts following BoJ policy review. As BoJ will no longer purchase Nikkei 225 ETFs, the index will lose an important supporter that has been stepping in to buy dips during correction. JAP225 may start a phase of underperformance now. In case declines continue, the near-term support to watch can be found at the lower limit of 1:1 market geometry (28,750 pts). If this is not enough to stop sellers, next support can be found in 27,600 pts area, where 100-session moving average and the lower limit of the upward channel can be found.
Source: xStation5
