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Bank of Japan made ‘fateful’ error last week, says Goldman Sachs

The Bank of Japan (BoJ) made a "fateful miscalculation" when it opted to hold interest rates at its meeting last week, Goldman Sachs has said.

The BoJ maintained its -0.1 percent deposit rate and its 80 trillion yen ($0.8 trillion) base money target on Thursday, surprising market watchers who had forecast further stimulus measures.


The central bank also cut its inflation and economic growth forecasts for the 2016-2017 fiscal year.

"The BoJ seemed intent on teaching the markets to be 'patient,' downgrading the inflation forecast yet again while taking no action. This is a fateful miscalculation in our view," Goldman analysts led by Robin Brooks said in a report on Tuesday.

"Unconventional easing is above all an expectations game, where it is necessary to shock markets again and again, until they have no reason to question a central bank's commitment to its inflation target. Preaching 'patience' is the opposite, telling markets they expect too much," they added.

Last week, the BoJ cuts its gross domestic product (GDP) forecast for 2016-2017 to 1.2 percent, having predicted expansion of 1.5 percent in January.

It also cut predicted core consumer price index (CPI) inflation to 0.5 percent from 0.8 percent.

Goldman said the BoJ should have announced further measures to stimulate the economy and boost inflation at its last meeting.

Having cut rates below zero percent in January, the BoJ could have focused on balance sheet expansion in April, perhaps by lifting housing loans off private banks' balance sheets, suggested Brooks.

The Japanese yen gained sharply on Thursday following the BoJ announcement and has continued its upward trend. On Tuesday, the U.S. dollar fell below 106 yen, the lowest since September 2014.

"There is little doubt in our minds that $/JPY will keep falling in the near term, until (BoJ) Governor Kuroda is forced to respond with overwhelming force. We therefore hold to our structural view that $/JPY ultimately will go a lot higher," Brooks said.

Kit Juckes, a well-known strategist at Societe Generale, advocated buying dollar-yen at 101.50 on Tuesday, with a stop order just below 100 (when a trade is automatically sold if prices fall below a certain price).

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