New Overnight Developments Abroad: Bank of Japan Easing Steps Surpassed Expectations

December 19, 2008

The yen strengthened 0.4% against the dollar and much more versus the euro in spite of Bank of Japan actions.

The dollar advanced 1.8% against the euro, 1.7% versus the Canadian dollar and Swiss franc, 1.5% against the kiwi, 0.5% against the Aussie dollar and 0.2% relative to sterling.

Asian stocks closed mixed. Nikkei -0.9%. Hang Seng -2.4%. Thailand -1.0%. Vietnam +0.6%. China +0.3%. South Korea +0.4%. Australia +1.0%.

European stocks are trading lower by 2.0% in Britain, 1.5% in France and 1.1% in Germany. Today is a quadruple witching hour for equities.

Sovereign bond yields are broadly lower. The 10-year JGB touched 1.21%, lowest since July 2005, but recovered to 1.235%, down 2.5 basis points net.

Oil hit yet another low is is off 1.4% on balance at $35.71/barrel. Gold relapsed 2.5% to $838.90 per ounce.

The Bank of Japan Policy Board deliberated for 5 hours, 6 minutes of 2 days and then cut its overnight money target by 20 basis points to 0.1% (by a vote of 7-1 with Noda dissenting). The Lombard rate was sliced to 0.3% from 0.5%. The BOJ upped its monthly outright purchases of government bonds to Y 1.4 trillion from 1.2 trillion yen and broadened the range of JGB’s it will purchase. The central bank will also buy commercial paper outright to alleviate a corporate credit crunch and will consider other ways of pumping funds into the money market. Governor Shirakawa left the door open to more easing if necessary but denied that today’s actions constitute a return to quantitative easing.

The Bank of Japan also reduced its economic assessment, saying that exports are decreasing, domestic demand is weaker, profits are declining, employment and income are worsening, financial conditions have deteriorated sharply, CPI inflation is poised to moderate, and it “will likely take some time” for the necessary conditions for recovery to be satisfied.

Japan’s government is projecting no growth next fiscal year. Prime Minister Aso called the BOJ actions “timely.”

Ukraine’s overnight refinancing rate was hiked to 22% from 18%, and the unsecured deposit rate was raised 500 basis points to 25%. These steps engineered a 10% rebound in the beleaguered hryvnia to 8.25/$.

Vietnam cut its base rate by 150 basis points to 8.5%, lowest since 8.25% over the 26 months to Feb 2008. The rate previously had been cut in four increments of 100 bps each from a peak of 14% in mid-October.

Denmark cut its key 1-week CD and lending rates by 50 basis points to 3.75%.

Japan’s all-industry index fell 0.5% in October and by 2.5% from a year earlier. Industrial output sank 2.5%, but construction (0.9%) and services (0.4%) rose.

British consumer confidence recovered a bit further to -33 in December from -35 in November and -39 last July. The better-than-anticipated result reflects a psychological lift from the cut in VAT taxes.

INSEE of France projects negative French GDP growth of 0.8% in the present quarter and a continuing contraction in each of the next two quarters. This downward revision follows announced results that business sentiment dropped 6 points in December to 73, lowest since June 1993 and down from 91 as recently as September.

German producer price inflation fell to 5.3% in November from 7.8% in October. The non-energy PPI index slid to 2.1% from 2.9%. The monthly drop of 1.5% in all producer prices was 50% greater than expected.

Turkish consumer confidence sagged to 68.88 in November from 74.24 in October.

China raised taxes on the consumption of a wide variety of energies.

Canadian CPI inflation fell to 2.0% from 2.6% last month. Core dropped to 1.7% from 2.4%.


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