Japan unloads, ECB holds fire

It was all about central banks today as the Bank of Japan deployed its full arsenal while the ECB held its fire.

Expectations were high that the Japanese central bank would announce a major shift in monetary policy, and it duly delivered. The bank unveiled a series of "unconventional' easing measures aimed at re-inflating the economy.

They included the expected 2% inflation target over the next two years; a commitment to open-ended QE; and a scrapping of the bank note rule (the value of Japanese government bonds will now be allowed to exceed the amounts of notes and coins in circulation).

The measures also included extending the duration of bond purchases from three years to seven, increasing JGB purchases to 7tn yen per month from 4.5tn; doubling ETF and JREIT purchases; and targeting the monetary base instead of the overnight rate - the monetary base will be doubled over the next two years.

Overall, the central bank exceeded already high expectations, which was crucial for its damaged credibility. Targeting the monetary base was probably the biggest surprise, and showed the bank's determination to lift inflation expectations.

In addition, the new policy is clearly aimed at driving up asset prices, which in turn will stimulate the real economy. At least that is the theory. For the policy to be successful, credit creation needs to pick up and the inflation threat needs to be credible.

However, the new approach will surely be positive for risk assets. The Markit iTraxx Japan index tightened 5.5bps to 105.5bps, continuing its strong performance this year. European credit indices opened tighter on the news.

Attention then turned to the ECB's monthly rate setting meeting. There were hopes among a minority of participants that ECB President Mario Draghi would announce a cut in rates, but this was always unlikely, and its inactivity left the central bank looking timid compared with its Japanese counterpart.

Draghi did strike a relatively dovish tone in his press conference, where he distanced the ECB from the Eurogroup's clumsy handling of the Cyprus bailout. The initial Cyprus plan was "not smart", according to Draghi - an early contender for understatement of the year.

Aside from Cyprus, he reiterated the ECB's readiness to act and the potency of the Outright Monetary Transactions programme, although he refrained from giving details on how the mechanism would work in practice.

By late afternoon European markets had given back their earlier gains. The Markit iTraxx Europe was slightly tighter at 120.5bps, while the Markit iTraxx Crossover was 3bps wider at 478bps.

Central bank announcements overshadowed important economic news earlier today. The Markit PMIs for the services sector continued to paint a picture of a region in economic decline, with France's survey particularly worrying.

Germany's PMI also came in below expectations, while Italy and Spain languished firmly in contraction territory. Clearly, the big question on how to stimulate the eurozone economy remains unanswered, at least for now.

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