Bank Of Japan Stimulus Measures Send GBP USD Exchange Rate Lower

Published: Thursday, 20 December 2012 09:00 BST - Written by Tim Boyer

STORY LINK Bank Of Japan Stimulus Measures Send GBP USD Exchange Rate Lower

The Bank of Japan announced during last night’s Asian session that it is set to throw the proverbial kitchen sink at its flagging economy in an effort to increase activity levels. The Japanese central bank has revealed within the last four hours that it is to add a whopping Y10tn to its existing asset purchase scheme in order to promote the flow of credit from its retail banking sector to private individuals and small to medium sized enterprises.

The move comes following last weekend’s victory by Shinzo Abe and his Liberal Democratic party in the nation’s general election. It would appear that Japanese Q3 and amended Q2 GDP data, released earlier this month, which showed that the world’s third largest economy had slipped back into a technical recession, has also served to prompt the move. The BoJ’s increase to its domestic QE programme may not be its only policy alteration following Abe’s victory – last night’s announcement also hinted that the nation’s stringent inflation target may be relaxed in the near future as part of an all-out ‘go for growth’ initiative.

Perhaps surprisingly, Japan’s benchmark Nikkei 225 equities index was trading down by over 0.50% during the latter part of the overnight session. This was partly a re-treading of the tried and tested market adage ‘buy on the rumour, sell on the news’, as the measures had been well-trailed in the lead-up to Abe’s victory. However, there is more to market participants’ reaction than this; the Bank of Japan’s Governor Masaaki Shirakawa has consistently argued that buying up bonds in a willy-nilly fashion threatens the stability of Japan’s economy. As we have seen many times previously, the market detests discord.

The generally ‘risk off’ trading environment which has prevailed during the overnight session has elicited some support for the safe haven US Dollar, causing the GBP USD exchange rate to pull back from yesterday’s visit to post-1.6300 levels. The GBP USD exchange rate currently stands at 1.6248.

Elsewhere, the Pound could remain under selling pressure for the remainder of the year following yesterday’s Bank of England minutes which prophesied that it is ‘quite likely’ that activity in the UK economy will contract during the final three months of 2012.

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