US stocks may have already forgotten about the dramatic collapse in Japanese equities and the surge in the Yen which wiped out months of profits from macro funds (and certainly the latest GDP miss) with the S&P wiping out some 15 points in losses in 36 minutes, but for Japan the hangover from Kuroda's lack of action last night remains, because according to Mark Cudmore, former FX trader who currently writes for Bloomberg, the BOJ made a massive misstep. Here's why.

The BOJ's Massive Misstep

It’s hard to avoid the conclusion, confirmed by the price action, that the Bank of Japan messed up today. The magnitude of the surprise means there’ll be follow-through in asset reaction, including yen strength, but ultimately this makes the long-term prognosis for the currency even more negative.

Even if keeping policy unchanged might once have been the correct decision, it’s not now. The failure to deliver, especially after Governor Kuroda’s comments about currency appreciation had driven hopes for further easing so high, is terrible news for the Japanese economy. Not to mention a further blow to the BOJ’s credibility.

The immediate surge in the yen and the panicked sell-off in equities were the most obvious examples of trader disappointment. And the currency’s rally will put further downward pressure on both growth and inflation.

It’s important to distinguish between the short-term surprise, which is bullish yen, and the longer-term consequences of the “mistake.”

Short-term, the lack of easing is currency supportive. However, the bigger picture is that the BOJ is extending the Japanese economic slump. And, eventually, that will either directly feed through to currency weakness or compel the central bank to deliver a much bigger policy surprise.

Japan’s government debt pile is roughly 250% of GDP. About 41% of tax revenue goes to debt servicing. The country needs inflation desperately. The BOJ today said it’s going to take longer to arrive. That means consensus 2016 growth and inflation forecasts, of 0.5% and 0.3% respectively, are likely to be revised down further.

Don’t fight the yen rally today. The 18-month low in USD/JPY, of 107.63, may now be vulnerable, especially in the context of last night’s dovish Fed statement. But don’t confuse momentum with fundamental strength.

Then again, all the algos need to hear to fight the yen rally is to be told not to fight it and sure enough that's precisely what they have been doing since the open today, and as of moments ago we are already nearly 100 pips off the lows because of "hope."