Today, the Bank of Japan (BoJ) released its most recent monetary policy statement. How could it affect the gold market?

The BoJ further eased its monetary policy since “there is considerable uncertainty over the outlook for prices against the background of uncertainties surrounding overseas economies and global financial markets”. In order to beat deflation and boost the economy, the central bank of Japan announced the expansion of the ETFs from financial institutions from 3.3 to 6 trillion yen. Therefore, the BoJ’s presence in the Japanese financial market will further strengthen. Moreover, the central bank doubled its U.S. dollar-lending facility from $12 to $24 billion, admitting a dollar funding crisis.

How did markets react to the BoJ’s announcement? Well, Japanese stocks initially fell, while the yen surged. The reason for such a reaction is that markets expected a larger stimulus. Most analysts predicted more from the central bank of Japan, they bet on an interest rate cut, on expansionary changes in the monetary base or even on the introduction of the helicopter money. However, the BoJ kept interest rates unchanged and did not expand its purchases of government bonds. The limited move boosted not only the yen, but also gold which gained after the disappointing BoJ measures. However, the price of gold started to decline after a while. When we looked last time, it was trading around $1,330 during Asian trading hours.

Summing up, the BoJ enhanced its monetary easing, but its measures were below market expectations. The current situation resembles the December announcement when the central bank of Japan also disappointed the markets. The limited move may create the impression that the BoJ lacks the ammunition to fight deflation and spur economic growth. The next meeting will be crucial as “the Bank will conduct a comprehensive assessment of the developments in economic activity and prices under ‘QQE’ and ‘QQE with a Negative Interest Rate’ as well as these policy effects”. The BoJ which is less dovish than expected gives the Fed more room to tighten its monetary conditions further, which would be negative for the gold market. However, the Fed chickened out again in Julyand the September hike is rather unlikely due to U.S. presidential elections. Moreover, a stronger yen implies a softer upward pressure on the U.S. dollar, which is positive for the yellow metal. Indeed, there has recently been a clear positive correlation between the yen and gold.