This morning’s actions by the Bank of Japan in tweaking its monetary policy framework appear to have had the desired effect in weakening the yen, and boosting the Nikkei, with sharp rallies in bank and financial stocks.

While Japanese policymakers kept their options open with respect to further cuts to the headline rate into negative territory they appear to have focussed their attention on targeting the shape of the yield curve in order to take the pressure off banks as a flatter yield curve took its toll on bank profitability.

In targeting the yield curve in this way and scrapping its bond buying maturity range the central bank is certainly helping but in targeting the 10 year yield so that it hovers around 0% the bank is inevitably tightening policy in some areas of the curve, given that 10 year yields were at -0.06% just prior to the announcement.  

For now markets seem to like what the Bank of Japan has announced in looking to boost meet its inflation target, but it’s hard to escape the fact that after the market has settled down the yen will start rising again and the Nikkei could well fall back.

Ultimately while these actions may well help the banks, it’s doubtful they will to help the Japanese economy that much, and in some ways it shows how little flexibility the central bank has, given how experimental policy is now becoming.

To sum up  this morning’s actions by the central bank are not so much an easing as a tinkering around the edges of a failing policy. The original tinkerman Leicester City manager Claudio Ranieri would have been proud.

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