The central banks continue with their ability to surprise the market even in these trying times. It was the turn of the Bank of Japan (BOJ) today. It surprised the market in two ways. First, it expanded its asset purchase plan by JPY10 trillion ($128 bln). Second, it set an inflation goal of 1%.
As noted yesterday, the BOJ has come under more pressure locally to do more to arrest deflation in the light of the weak performance in Japan, and the more assertive action taken by the Federal Reserve and European Central Bank. It is the first expansion of its asset purchase program since October.
Previously, the BOJ had defined price stability as between 0% and 2%. It now suggest 1% is the goal. This is still a bit ambiguous. For the record, Japan's CPI has not risen by 1% in any year since 1997. Still, the surprise was sufficient to lift the dollar above its 200-day moving average against the yen for the first time since mid-April 2011 (~JPY78.05).
Nevertheless, the dollar needs to convincingly break the upper end of the four-month range that extends toward JPY78.50. Although it is highly unlikely, this is where BOJ intervention in the foreign exchange market would likely be more effective. It has the wind to its back, and the intervention would reinforce the easing of monetary policy via asset purchases.
Disclosure: No positions