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Bank of Japan’s Small Step Towards Ending Monetary Stimulus Fails to Satisfy Investors as Euro Strengthens

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The Bank of Japan (BOJ) made a small move towards ending years of monetary stimulus, causing the yen to weaken to a fresh 15-year low against the euro. However, some investors were left disappointed as they had expected a larger move. The BOJ loosened its grip on long-term interest rates by adjusting its bond yield control policy, taking a small step towards dismantling its controversial monetary stimulus of the past decade. The central bank said it would keep the 10-year government bond yield around 0%, but defined 1.0% as a loose “upper bound” rather than a strict cap. It also removed a pledge to defend this level with unlimited bond purchases.

As a result, the euro jumped to a 15-year high against the Japanese yen, rising 1.3% to 160.35 yen. Meanwhile, the yen slid 1.2% to 150.89, marking a new one-year low. Traders focused on the BOJ’s dovish pledge to “patiently” maintain accommodative policy and the forecasted drop in inflation below 2% by 2025.

Frederik Romedahl, a director at Danske Bank, commented, “This was another, likely the last, step ahead of dismantling the [bond] yield curve control altogether. However, the BOJ still needs confirmation that inflation has sustainably moved above the 2% target before they are ready to take bigger steps to normalization.”

In other news, expectations that interest rates will remain high supported the euro, which saw a slight increase of 0.1% to $1.0628. Euro zone inflation rose by only 2.9% in October, down from 4.3% in September, marking its slowest pace since July 2021. This eases pressure on the European Central Bank (ECB) to hike rates. Euro zone gross domestic product (GDP) also experienced a small decline of 0.1% in the three months to September. However, analysts noted that it does not add pressure on the ECB to cut rates, suggesting that the tightening undertaken over the past year has brought about the desired soft landing and disinflationary environment.

Joshua Mahony, Chief Market Analyst at Scope Markets, said, “With euro zone growth coming in at an uninspiring -0.1% for the quarter, there is a feeling that tightening undertaken over the course of the past year has brought to the kind of soft landing and disinflationary environment the ECB has been aiming for.”

The dollar index saw a slight increase of 0.07% at 106.24. Analysts believe that the dollar remains supported by the potential for another rate hike from the Federal Reserve, highlighting the resilience of the U.S. economy. The Federal Reserve is expected to hold rates steady in its policy decision scheduled for Wednesday.

In the United Kingdom, the Bank of England is also expected to maintain its current interest rate in its upcoming decision. As a result, the British pound remained flat at $1.2160.

Overall, the financial markets experienced mixed reactions to the latest developments in Japan and the euro zone. Investors will continue to monitor central bank decisions and economic indicators for further insights into monetary policy and market trends.

[Note: The article has been rewritten for clarity and adherence to the BBC News style guide.]

More detail via Yahoo Sports here… ( Image via Yahoo Sports )

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