Should the Bank of Japan Have Done More?
After a month of equity and government bond market volatility, the Bank of Japan's (BOJ) monetary policy announcement on Tuesday came as a letdown to investors expecting the central bank to adopt a more pro-active policy stance.
The U.S. dollar-yen fell to as low as 97.78 and the Nikkei 225 slipped as much as 1.5 percent, reflecting disappointment among market participants who were looking for the BOJ to announce measures aimed at calming swings in Japanese government bond (JGB) yields that hit a one-year high around 1 percent in late-May.
"The BOJ should have done something to calm down volatility and the level of the JGB yields. We had a big collapse in the equity market partly because of high volatility in the JGB market. It's important the BOJ and government show concern over the correction," Kenji Abe, equity strategist at Citigroup Global Markets Japan, told CNBC.
Strategists had expected the central bank to increase the maturity of its fixed-rate loan facility to two years from one year, to help curb volatility in the longer end of the yield curve. The BOJ currently offers one-year loans at a fixed rate of 0.1 percent to financial institutions.
There was also speculation that the BOJ would step up purchases of exchange traded funds and real estate investment trusts.
Instead, it kept monetary policy steady, voting unanimously to maintain its pledge of increasing base money at an annual pace of 60 trillion to 70 trillion yen ($600-700 billion). However, the central bank did raise its assessment of the economy, stating that it is "picking up."
Central Bank Confident
Experts say the BOJ's inaction is a reflection that it is confident with the way things are shaping up at the moment.
"The BOJ is sending the message that at the end of the day it's a central bank and will not pander to the markets too much," said Vishnu Varathan, market economist at Mizuho Corporate Bank.
"They are confident they have done enough - and are leading by example when it comes to confidence," he added.
In addition, recent robust economic data including the better-than-expected first quarter gross domestic product (GDP) print and an acceleration in wage growth in April, has provided some additional comfort, said experts. Japan's gross domestic product, for example, rose 4.1 percent in the January-March quarter from a year earlier.
(Read More: An End in Sight for Japan's Turbulent Markets?)
"They [BOJ] are pretty happy with how things are going at the moment, and we're seeing that reflected in data flows," said Chris Weston, chief market strategist at trading firm IG Markets. "But, I'm disappointed they didn't announce anything like extending the loan maturities."
However, experts aren't ruling out action at the upcoming BOJ policy meeting on July 10-11 ahead of the upper house of parliament elections on July 21.
"The Nikkei and JGB yields will be watched closely. At the end of the day capital market gains will translate into political capital for the Liberal Democratic Party to push through 'Abenomics'," said Varathan.
— By CNBC's Ansuya Harjani