The BOJ surprised the market by increasing its QE program sending USDJPY through the 79.00 figure, but the pair had difficulty holding that level as risk off flows in early European session sent it back below the barrier. The BOJ doubled the scope of its QE program increasing it to 10 Trillion yen with Governor Shirakawa noting that board members were concerned about the economic slowdown in China.

Interestingly enough Shirakawa stated that the ongoing Island dispute with China had no bearing on today’s decision, although the political fallout from the recent hostilities could prove to be a much greater challenge to Japanese growth going forward. The move was welcomed by Japanese lawmakers with Azumi noting that Japanese recovery was being endangered by the slowdown in global growth and the relentless rise of the yen.

Nevertheless the latest move by the BOJ is a mere pittance in relation to Fed recent announcement of additional 40 Billion dollars of new QE per month. As it stands now the BOJ program is only one tenth the side of the Fed’s and therefore is unlikely to have a sustained impact on USD/JPY rates.

Still the move the BOJ underscores the gravity of the current Japanese economic situation and suggests that policymakers are clearly concerned about the negative effects of strong yen on Japanese growth. It may also hint at the possibility that the BOJ will expand its balance sheet in a much more dramatic fashion as the year comes to a close in order to further weaken the yen. For now the pair appears to have stabilized at the 79.00 level and could inch higher as the day progresses and North American traders have a chance to digest the news.

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