OREANDA-NEWS. Bank of Japan Policy Moves Trigger Volatility in Japanese Equities.

BOJ Unveils Policy Moves after Fed Hike

Last Friday, the Bank of Japan (BOJ) maintained its target for annual monetary stimulus of JPY 80 trillion (USD 650 billion), in an expression of confidence in the Japan economy, as various data from business confidence to unemployment exceeded expectations.

In an unexpected move, the central bank announced its intention to extend the average maturity of Japanese government bonds in its portfolio from 7 to 12 years from the current 7 to 10 years, “with a view to encouraging a decline in interest rates across the entire yield curve”.

The BOJ also established an additional exchange-traded funds (ETFs) purchasing programme that will target “ETFs composed of stocks issues by firms that are proactively making investment in physical and human capital”.  The new scheme will purchase ETFs at an annual pace of JPY 300 billion (USD 2.5 billion), which is one-tenth the size of the current ETF programme, which purchases JPY 3 trillion (USD 25 billion) of ETFs annually. Starting in April 2016, the central bank intends to purchase ETFs which track the JPX-Nikkei Index 400.

The announcements came two days after the US Federal Reserve raised interest rates on Wednesday. The highly telegraphed move ended months of uncertainty and anticipation, with Japanese stocks tracking the rally in U.S. shares.

Nikkei 225’s Third-Largest Intraday Move

Last Friday, the Nikkei 225 Index initially rallied 2.6% on news that the BOJ was expanding its ETF purchasing programme. However, the size of the programme disappointed investors and the benchmark index reversed course to close 1.9% lower. 

BOJ Governor Haruhiko Kuroda’s comments further roiled market sentiment and dampened investor optimism as he emphasised that the policy changes were “not additional easing”, but were “aimed at ensuring the smooth implementation of QQE, and to further spread its effect to the real economy".

The Nikkei 225 Index moved 887 index points on 18 December, which was its third-largest intraday price move to-date in 2015. The index movement was equivalent to 177 ticks of the SGX Yen Nikkei 225 Index Futures (where 1 tick = 5 index points), approximately four times the average number of ticks per trading day in 2015. 

Global Monetary Policy Continues to Diverge

In the year-to-date, the Japan stock market has outperformed U.S. equities, with the Nikkei 225 Index gaining 9%, versus a drop of 3% in the S&P 500 Index.

Global divergence in monetary policy is set to widen further in 2016 as Japan continues with ‘Abenomics’, the European Central Bank maintains a loose policy, and the US gradually hikes interest rates.  

SGX Nikkei 225 Index Futures

Launched in 1986, the SGX Yen Nikkei 225 Index Futures made history as the first equity index futures contract in Asia, and as the world’s first futures contract based on the Japanese stock market. Today, the SGX Yen Nikkei 225 Index Futures remains the dominant offshore centre for trading Nikkei 225 Index derivatives.

SGX offers extended trading hours for the SGX Nikkei 225 Index Futures and Options until 2am Singapore time, covering the London close. The finer tick (2.5 basis points) of SGX Yen Nikkei 225 Index Futures compared to the domestic Large Nikkei Futures (5 basis points), allows for greater precision and price efficiency.

In addition, SGX Nikkei derivatives remain available for trading on all Japan holidays, with the exception of New Year’s Day (1 January). Margin discounts on spreads formed with other SGX derivatives allow for greater capital efficiency for an investor that has views on multiple Asian markets. 

Cross-Product Margin Offsets

Contract

Contract

Margin Offset

SGX USD Nikkei 225 Index Futures

SGX Nikkei 225 Index Futures

98%

SGX FTSE China A50 Index Futures

SGX Nikkei 225 Index Futures

45%

SGX MSCI Taiwan Index Futures

SGX Nikkei 225 Index Futures

45%

SGX CNX Nifty Index Futures

SGX Nikkei 225 Index Futures

40%

SGX MSCI Singapore index Futures

SGX Nikkei 225 Index Futures

35%

Source: SGX as of 21 December 2015