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 In a pre-emptive move to combat risks of deflation, the BoJ
unleashed another round of quantitative easing. It raised its
monetary base target to an annual increase of 80 trillion yen
($724.5 billion) from 60-70 trillion yen and tripled its purchase of
risk assets such as exchange traded funds (ETFs) and real estate
investment trusts (REITs).
While some in the market had expected some easing, most had thought
any additional action was months away as Governor Haruhiko Kuroda
had voiced optimism over the Japanese economic outlook even after
soft data.
As a result, the dollar surged past its Oct. 1 high of 110.09 yen,
rising as far as 111.89 yen, its highest level since January
2008. It has climbed 2.4 percent on the day, on course for its
biggest gain since April last year.
"It is a bit of a Halloween shocker for the markets," said Jeremy
Stretch, head of currency strategy at CIBC World Markets. "Along
with the reallocation by the pension fund, it is a double whammy for
the yen."
A Japanese government panel overseeing the giant Government Pension
Investment Fund (GPIF) approved plans for the fund to raise its
holding of foreign stocks to 25 percent of its portfolio from 12
percent.
Gareth Berry, a currency analyst with UBS, said both these measures
are likely to propel dollar/yen higher, taking the pair closer to
their three-month forecast of 115 yen.
"We doubt it would escape investor attention that, with the BoJ
buying at a faster pace with near-immediate effect, an early start
to GPIF diversification could be more likely," he wrote.
CURRENCY WARS
Analysts said the move by the BoJ is likely to put more pressure on
the European Central Bank to ease policy as well. Both central banks
want to boost inflation, and cheapening their currencies by flooding
markets through massive asset purchases is one of the ways to
encourage growth and bolster prices.
Paul Mackel, head of Asian currency research at HSBC, said the BoJ's
move would intensify currency wars, especially given the risk ECB
easing is on the cards.
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"With other central banks continuing to loosen policy and put
downward pressure on their currencies, we believe that the dollar
will increasingly have to shoulder the burden of appreciation," he
said in a note.
Data on Friday showed annual inflation in the euro zone rose in line
with expectations in October, providing some relief but doing
nothing to alter expectations that the ECB could still ease policy
in coming months.
The euro jumped to a six-week high against the yen of 140.65 yen
after the euro zone inflation. It also pared losses against the
dollar, but was still down on the day. It was last down 0.3 percent
lower at $1.2580, with bears targeting the Oct. 3 low of $1.2500.
The drop came as German retail sales posted their biggest monthly
decline in more than seven years in September, data showed on
Friday.
The dollar index climbed as far as 86.736 -- a high last seen on
Oct. 6, approaching a four-year high -- as the greenback also
benefited from upbeat U.S. growth figures published on Thursday.
The world's largest economy grew at an annual pace of 3.5 percent in
the third quarter, beating a forecast of 3.0 percent. Earlier this
week the Fed sounded more optimistic about a recovery, prompting
investors to bring forward chances of when the central bank will
start to hike rates.
(Additional reporting by Shinichi Saoshiro and Hideyuki Sano;
Editing by Catherine Evans)
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