Asia Session Highlights

As expected, the Bank of Japan kept interest unchanged at 0.10%. Rather, policymakers said they will bolster current liquidity-boosting measures by expanding the range of assets acceptable as collateral for loans. As for the bank’s assessment of current economic conditions, traders were given a familiar mantra with the BOJ saying that the economy has deteriorated “significantly” and will continue to do so “for the time being”. Although the BOJ still expects the economy will begin to recover late into the 2009 fiscal year (Winter-Spring, 2010), the level of uncertainty about the forecast remains “high”. Further, members of the monetary policy body expressed concern about “downside risk of inflationary expectations”, alluding to the possibility of deflation. This could prove disastrous for the world’s second-largest economy as consumers and businesses perpetually put off spending and investment to wait for the best possible bargain, sinking the economy still deeper into recession.

The Reserve Bank of Australia surprised the markets, cutting benchmark interest rates 25 basis points to bring borrowing costs to 3.00%. Importantly, RBA Governor Glenn Stevens reiterated that the Australian economy is contracting less severely than that of its main trading partners and expressed confidence that while growth will likely continue to decline over the rest of the year, the “major change” in both monetary and fiscal policy will “provide significant support to domestic demand over the period ahead.” Most notably, Stevens conspicuously did not include any reference to revisiting the possibility of additional cuts in upcoming policy meetings, suggesting the central bank has reached the end of its easing cycle. The Australian Dollar initially stumbled as the announcement crossed the wires but quick rebounded to add 0.8% against its US counterpart as traders priced in the reduction in rate cut expectations.