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Quantitative easing

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Japanese shares rose to a two-month high on Friday, October 30, after Bank of Japan decided to keep its monetary easing policy steady.

The benchmark Nikkei 225 initially fell on the decision by more than 0.4%.

The index recovered to close up 0.78% at 19,083.1 points.

BoJ’s 2% inflation target was also pushed back by about six months.

While forecasts for economic growth for the year to March 2016 were also lowered to 1.2% from 1.7%.Bank of Japan QE decision 2015

Japan’s central bank governor Haruhiko Kuroda told reporters on October 30 the inflation target timing had been delayed “largely due to the effect of energy price falls”.

The BoJ’s current stimulus package is designed to give a boost to the world’s third-largest economy.

Private consumption makes up some 60% of Japan’s economic activity, but the country has struggled with deflation, or falling prices, for more than 15 years. Lower prices for goods in Japan have seen consumers hold on to their money in the hope of even lower prices later on.

The stimulus package is designed to encourage lending, which in turn should see consumers spending more.

Earlier on Friday, a string of domestic data showed Japan’s core consumer inflation number had fallen 0.1% in September from a year ago, household spending had fallen 0.4% year-on-year while unemployment had remained steady at 3.4% compared to August.

The data fuelled some speculation the BoJ would make a move. But eight out of nine board members voted in favor of the decision.

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The euro has reached a nine-year low against the US dollar as investors predicted the European Central Bank (ECB) may act to stimulate the economy.

The European currency fell by 1.2% against the dollar to $1.1864, marking its weakest level since March 2006, before recovering slightly to $1.19370.

The drop follows ECB president Mario Draghi’s comments indicating the bank could soon start quantitative easing (QE).

Greek political turmoil also weighed on the currency.

Although the ECB has already cut interest rates to a record low level, and also bought some bonds issued by private companies, a full-scale program of QE has not yet been launched.

On January 2, Mario Draghi hinted in a newspaper interview that the ECB might soon start a policy of QE by buying government bonds, thus copying its counterparts in the UK and US.

The purpose would be to inject cash into the banking system, stimulate the economy and push prices higher.Euro reaches nine year low vs US dollar

In an interview with German newspaper Handelsblatt, Mario Draghi said: “We are making technical preparations to alter the size, pace and composition of our measures in early 2015.”

Political turmoil in Greece also weighed on the euro, with fears that the general election on January 25, could see the anti-austerity, left-wing Syriza party take control of the country.

The possibility has sparked fears about whether Greece will stick to the terms of its international bailout and stay in the eurozone.

On January 3, German magazine Der Spiegel magazine said Germany believes the eurozone would be able to cope with a Greek “exit” from the euro, if the Syriza party wins the Greek election.

Reacting to the Der Speigel report, a spokesman for German Chancellor Angela Merkel said there was no change in German policy and the government expects Greece to fulfill its obligations under the EU, ECB and IMF bailout.

France’s President Francois Hollande also commented, saying it was now “up to the Greeks” to decide whether to remain a part of the single currency.

“Europe cannot continue to be identified by austerity,” Francois Hollande added, suggesting that the eurozone needs to focus more on growth than reducing its deficit.

Analysts said the euro was likely to remain volatile for the next few weeks.

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Global stock markets rallied after the US Federal Reserve’s commitment to keep interest rates low offset its decision to taper its stimulus programme.

Germany’s Dax and France’s CAC were 1.5% in mid-morning trading, while the UK’s FTSE rose 1%. Japan’s Nikkei 225 closed up 1.7%.

The Fed said it would scale back its $85 billion a month bond-buying programme by $10 billion a month.

Analysts said the taper was less than markets had expected.

Investors and economists have been watching closely for when the Fed would scale back its stimulus, fearing that a steep taper could undermine economic recovery.

Global stock markets rallied after the US Federal Reserve's commitment to keep interest rates low offset its decision to taper its stimulus programme

Global stock markets rallied after the US Federal Reserve’s commitment to keep interest rates low offset its decision to taper its stimulus programme

US markets had ended sharply higher on Wednesday following the Fed’s decision. The Dow Jones jumped 292.71 points, or 1.84%, to close at 16167.97, while both the Nasdaq and S&P 500 indexes rose by more than 1%.

The stimulus programme, called quantitative easing, was introduced by the Fed after the global financial crisis.

The main objective was to increase the money supply and improve liquidity in the financial system in the hope of sparking economic growth and supporting employment.

The Fed’s governing committee cited stronger job growth as a reason for the decision to begin winding down the programme.

It forecast the unemployment rate would fall to 6.3% in 2014 from its current level of 7%.

Analysts said the Fed’s decision to scale back the programme also indicated that it was confident of a sustained recovery in the US economy.

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