This morning, the Bank of Japan (BoJ) sprang a bit of a surprise on the markets.
Many investors were expecting to hear the sound of rotor blades, as a fleet of monetary helicopters took off to spray their bounty across the streets of Tokyo.
Or at least to see something a bit radical like a big issuance of 50-year bonds that no one but the BoJ would be daft enough to buy.
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Nope. Bar a few tweaks, the bank did virtually nothing. It certainly wasn't shock and awe.
But the most surprising thing is that the market seemed to rather like it
The Bank of Japan puts down the bazooka
This morning, everyone was primed for a big BoJ meeting. I have to admit that I was fairly sure it wouldhave a crack at doing something.
Itdid do something. But not very much, in the context.
Here's where we were before the meeting. The BoJ is already buying 80trn of Japanese government bonds a year, which equates to roughly $65bn a month. It is also buying 3trn of exchange-traded funds (ETFs) a year in other words, it's pumping about $2.5bn a month into the stockmarket. Meanwhile, Japanese interest rates are negative, at -0.1%.
The bond purchases remained unchanged, as did the interest rate. The BoJ is doubling equity purchases so now it'll be buying another $2bn-odd a month of Japanese equities. The BoJ also extended its dollar-lending facilities making it easier for banks to borrow US dollars and thus expand abroad.
The BoJ is also going to review the effectiveness of monetary policy. There will be a "comprehensive assessment" conducted at the next meeting in September. In other words, BoJ boss Haruhiko Kuroda is keeping his options open.
Now some of that sounds quite radical the notion of a central bank directly buying stocks is a good example which often surprises people but relative to expectations, this was not what you'd call a big package.
The yen, for example, strengthened sharply. Weakening the yen has been viewed by many as the key purpose of Abenomics, and also the only reason for Japanese stocks to rise, so that suggests disappointment from the market. And certainly, many analysts queued up to describe this as a "missed opportunity".
And yet, looking at the overall market reaction, I'm not so sure.
Yen weakens yet stocks rise?
Firstly, what was interesting is the reaction of bonds. The yield on ten-year Japanese government bonds jumped. In fact, it saw its biggest rise since May 2013, according to the Financial Times.
Don't get me wrong Japanese government bonds are still no bargain. Having hit a record low of negative 0.295% earlier this week, the yield rose to negative 0.178%. So you'd be getting charged slightly less to give the Japanese government your money to hang on to for ten years.
Think this through for a moment though. If you think that we need central bank "stimulus" to create inflation, then the BoJ's rather restrained actions are technically deflationary. Therefore, you'd expect bond yields to fall (if there's no inflation, or consumer prices are even falling, then bonds become more attractive, prices go up, and thus yields fall).
So rising bond yields point to something else. We've discussed on a number of occasions here why people might want to buy bonds with negative or minimal yields currency speculation or fear of deflation being two possible reasons.
But the biggest and most obvious reason yet the one that few people will acknowledge, because they still assume that markets are traditionally "rational" is that investors are buying bonds at ridiculously low yields because they assume that central banks will always take them off their hands.
If that ceases to be the case if there is no longer a guaranteed greater fool at the end of the line to take this rubbish off your hands at a higher price then there's no sensible reason to hold the stuff.
Japan's banking sector mounts a comeback
Secondly, what's even more interesting is that Japanese equities managed to end the session higher, despite initially taking a dive amid post-BoJ disappointment.
It's not what you'd expect judging by recent history. A stronger yen usually means weaker Japanese equities.
So what's going on? Well, the BoJ has taken a small but decisive shift towards buying equities. Why wouldn't you want to load up on more of what the country's central bank is buying?
(And as a British owner of yen-denominated Japanese stocks, I have to say that I rather like the idea that the yen can strengthen right alongside Japanese equities rising, although I wouldn't necessarily bet on that happy alignment lasting.)
But perhaps the most obvious explanation is this: negative interest rates are bad for banks. Rising yields are good for banks. And today's rally in Japanese equities was led by the banks. Indeed, MUFG Japan's biggest bank, which makes about 40% of its revenue offshore jumped by more than 7%.
As with most other developed countries around the world notably Europe Japan's banks have been one of the major millstones around the equity market's neck. If you want to get a decent rally going in a stockmarket, it's really hard to do it if you can't get the banks the heart of the financial system to rally along with it. And if you want to get inflation pumping into your economy, it's hard to do it without the banks.
So maybe Kuroda's subtle shift in focus towards the banking sector is a strategy move that might just work.
Don't get me wrong. I'm not convinced we've seen the last of the BoJ's efforts to reflate the Japanese economy. But if Japan's banks see a sustained upturn, that could be very interesting for anyone invested in Japanese stocks.
My colleague Charlie Morris over at The Fleet Street Letter has been writing a lot about banks closer to home recently. Charlie's one of the most independent-minded thinkers I know and he'll be guest-starring in the next issue of MoneyWeek magazine, but if you want to know what he's been saying about the banks before then, you can find out more about The Fleet Street Letter here.
