Bank of Japan announced that it will purchase Japanese Bonds, reports Fiona Cincotta.
Positivity in Asia overnight looks set to spill into Europe, with European bourses pointing to a higher start on the open. The upbeat mood in the market comes after the Bank of Japan announced it would be conducting outright purchases of Japanese government securities (text of announcement below), and amid and increased focus on the easing of lock down measures, globally, which is overshadowing weaker crude oil prices and signs that Chinese factories aren’t ramping up as quickly as anticipated.
Focus on central banks
As central bank spending sprees continued, BoJ acted in line with expectations by pledging to buy unlimited amounts of government bonds, scrapping the ¥80 trillion per year target. It also eased restrictions on the type of debt that could qualify.
The move by the BoJ comes ahead of the Federal Reserve and European Central Bank (ECB) meetings later in the week. While the Fed is not expected to take any more action after throwing pretty much everything, including the kitchen sink at the Coronavirus crisis; the ECB is expected to raise the size of its emergency bond buying package and keep pressing for sizeable fiscal stimulus.
Last week the solidarity of the Eurogroup was called into question following the European Council’s failure to deliver an ambitious unified response to the region’s economic crisis.
More U.S. states easing lock down measures
Attention is increasingly turning to how and the rate at which countries are easing lock down measures. The easing of restrictions is underpinning the upbeat mood. In the United States several states are preparing to ease Coronavirus restrictions. With fears rising that unemployment could explode higher, the market is focusing on the benefits of reopening the economy, rather than the concerns of a second wave of infection if measures are eased too soon.
Prime Minister Johnson’s return lifts GBP
News that Great Britain Prime Minister Boris Johnson is back, taking the reins in Downing Street is boosting sentiment and the British pound (GBP) at the start of the week. Expectations are for a pickup in momentum surrounding the UK exit strategy. Reports that some lock down restrictions could be lifted prior to May 7 is just the kind of good news that the pound needs after last week’s PMI and retail sales horror show.
The record low PMI reading for April, combined with the fastest pace of decline in retail sales on record resulted in the pound shedding 1% against the dollar last week. GBP/USD is recouping those losses up 0.5% as the new week kicks off.
Oil drops another 11%
Crude oil was a key driver of sentiment last week. As the price of oil moved trader sentiment followed suit. However, this isn’t the case at the start of the week as oil slumps over 11% in early trade as over supply fears persist. While supply remains greater than demand, oil prices will remain under pressure. The bottom line is that output needs to drop at a faster rate to compensate for the demand destruction that the Coronavirus brought along. Until that happens, or demand picks up oil prices will remain depressed.
Fiona Cincotta is a Market Analyst for Currency Live
Bank of Japan Announcement
Outline of Outright Purchases of Japanese Government Securities
The Bank of Japan, in conducting the outright purchases of Japanese government securities in a flexible manner, decided to conduct the purchases as follows, effective from April 28, 2020.
Regarding outright purchases of Japanese Government Bonds (JGBs), the Bank will announce the schedule separately in "Monthly Schedule of Outright Purchases of Japanese Government Bonds (Competitive Auction Method)."
Outright purchases of JGBs:
- Bonds to be purchased JGBs with coupons (2-year bonds, 5-year bonds, 10-year bonds, 20-year bonds, 30-year bonds, 40-year bonds, floating-rate bonds, and inflation-indexed bonds)
- Schedule of purchases The Bank, in principle, will release the schedule of purchases for the following month in advance on the last business day of each month.
- Amount to be purchased The Bank will conduct purchases in a flexible manner, taking account of market conditions, aiming to achieve the target level of a long-term interest rate specified by the guideline for market operations.
- Method for auctions A multiple-price competitive auction. JGBs with coupons (excluding floating-rate bonds and inflation-indexed bonds): Counterparties bid their "desired yield spreads," which are calculated by subtracting "benchmark yields" from the yields at which counterparties seek to sell to the Bank. Floating-rate bonds and inflation-indexed bonds: Counterparties bid their "desired price spreads," which are calculated by subtracting "benchmark prices" from the prices at which counterparties seek to sell to the Bank. With regard to the outright purchases of JGBs with coupons (excluding inflation indexed bonds and floating-rate bonds), the Bank may set a lower limit on the yield spreads for purchasing yields, taking account of market conditions.
Outright purchases of JGBs:
- Bonds to be purchased Among JGBs with coupons (2-year bonds, 5-year bonds, 10-year bonds, 20-year bonds, 30-year bonds, and 40-year bonds), mainly on-the-run issues.
- Schedule of purchases The Bank will conduct the auctions as needed, such as when the level of the yield curve changes substantially.
- Amount to be purchased Depending on market conditions, the Bank may set the purchase size per auction to a fixed amount or to an unlimited amount.
- Method for auctions Purchasing yields will be set per auction, by indicating the yield spreads from the benchmark yields which the Bank determines separately.
Outright purchases of treasury discount bills (T-Bills):
Regarding purchases of T-Bills, conducted as part of money market operations, the Bank will decide the purchase size per auction considering the effects on financial markets. The Bank will purchase about 500 billion to 3.0 trillion yen of T-Bills per auction for the time being.
