The Bank of Japan (BoJ) has gone from activist to bystander. The world's most aggressive central bank has wrong-footed investors by holding policy steady despite a weakening backdrop. There are reasons to hold back - but markets could have been let down more gently.
The case for further action has looked increasingly compelling. Prices are proving awkwardly stagnant. Data released earlier on April 28 showed the BoJ's preferred measure of annual price increases, excluding food and energy, slowing to just 0.7 per cent - far below the central bank's two per cent target. Forecasts are waning too: Japanese companies reckon consumer prices will rise merely 0.8 per cent a year from now. Meanwhile, the yen has been strengthening and growth is weak: economists at BNP Paribas forecast gross domestic product will rise by just 0.2 per cent this financial year.
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Little surprise, then, that investors were expecting BoJ Governor Haruhiko Kuroda to up the dosage of monetary stimulus, using some combination of extra bond-buying, a deeper push into negative interest rates, or more aggressive purchases of exchange-traded funds (ETF).
There is a good case for inaction, though. First, the BOJ already buys 80 trillion yen ($733 billion) of government bonds a year, boasts a 409-trillion balance sheet, and may soon run short of debt securities to buy. Second, its surprise introduction of negative rates in January was both unpopular and counterproductive, since the yen actually rose against the US dollar.
Third, buying more ETFs would be deeply unorthodox and yet unlikely to provoke big changes in corporate behaviour. And as Prime Minister Shinzo Abe is probably preparing to administer a big dollop of fiscal stimulus there is also a case for waiting to see what the government does first.
That said, Kuroda could have let investors know they were running ahead of themselves. Instead, he seems to have helped feed the anticipation - for example, telling parliament that the BoJ was not too big a player in ETFs, and reiterating to the Wall Street Journal that the bank would not "hesitate to take further easing measures" if needed to hit the inflation target. Doing less than expected not only prompted a violent and counter-productive reaction in markets. It also heightens the suspicion that the BOJ is running out of moves.
