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Bank of Japan, Reserve Bank of Australia

James Boston
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Japan’s Nikkei posted strong gains overnight, rising almost 3.5% in response to the Bank of Japan announcement that it will renew its special credit facility. The facility, which makes credit available to Japanese consumer and business borrowers, was set to expire in March.

The extension, and in fact doubling of this facility was the trigger for the Nikkei’s overnight jump, it is unlikely however that it provides a full explanation for such a sizable rise in equity markets.

Japan’s Nikkei 225 has risen almost 6% over the course of the last month, coming back from a 5 month low. Japanese stocks have been somewhat out of step with global equity markets over the past quarter and what we are seeing is an element of convergence as equities remain a favoured asset class with global investors.

The Reserve Bank of Australia (RBA) published the minutes of their February policy meeting where interest rates were kept on hold despite rising inflation. The policy committee members particularly noted that the Aussie Dollar had fallen 3% in the previous 2 months and was trading 15% off it’s peak of April 2013. The Bank agreed that the weakness in the currency was a contributing factor to the creep higher in inflation, but more importantly dismissed the surprise December inflation figure as containing a lot of ‘noise’.

Commodity price rises, driven particularly by stronger than expected Chinese demand, are having a positive effect on certain parts of the Australian economy. The dilemma for the RBA is how to cool inflation without choking off weaker areas of the economy, right now they are holding interest rates low as they await further data in the coming weeks. It is however unlikely that this is a sustainable position, rates will rise in Australia as soon as the RBA run out of valid reasons to maintain their loose monetary position. ‘Noise’ in the inflation figures will not work for a second month in a row.

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