BoJ Stimulus Likely, Greece To Set Out Reforms

A largely uneventful trading session on Thursday offered little direction heading into the Asian session overnight and the same is true as we near the open in Europe, as index futures waver around yesterday’s closing levels.

The release of the Bank of Japan minutes from the February meeting provided little new information on the position of the central bank. Policy makers voting 8-1 in favour of keeping the annual increase in the monetary base at ¥80 trillion, despite the minutes showing the Board expects inflation to remain around zero (when effects of sales tax hike are stripped out).

While falling oil prices are making the BoJ’s job much harder, inflation is well below the central banks 2% target and many are predicting that further easing will be necessary as early as next month. An increase in asset purchases from ¥80 trillion to ¥90 trillion is expected but it could be argued that this is not working so other avenues may be explored, such as negative interest rates which have been adopted by the European Central Bank.

The concern is that lower household and business inflation expectations could lead to lower spending and investment which could lead to another deflationary spiral in Japan, which suffered deflation for many years before Shinzo Abe was elected back in 2012. This could effectively destroy all the hard work undertaken by Abe and the central bank over the last couple of years and raise big questions about the effectiveness of Abenomics.

The full minutes from the BoJ meeting can be found here.

On the side lines of the EU Summit, talks continued overnight between Greece and its lenders regarding a reform package needed to secure the bailout extension and fund the country beyond next month. German Chancellor Angela Merkel had not been confident that a deal would be done but the comments following the discussion appeared to be more optimistic.

Greek Prime Minister Alexis Tsipras must now draft new reform measures to present to its creditors in the coming days in order to receive the extension. Given how things have gone in the past, we shouldn’t expect this to run smoothly as both parties have very different objectives here. Tsipras was voted in due to his tough bargaining stance, which appears to have got him nowhere so far and he has instead appeared inexperienced and problematic.

The odds of a Greek exit have risen significantly since his election victory although I think the far more likely outcome will be his party failing to stand by its pre-election promises and either conforming to the norm or admitting defeat and calling new elections.

The FTSE is expected to open 4 points lower, the CAC 6 points higher and the DAX 5 points lower.

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Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam