BoJ expected to hold off from further monetary easing – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the stronger US dollar is helping to lift USD/JPY although it has yet to break out above its recent narrow trading between the 100.00 and 105.00 levels.

Key Quotes

“The pair is mainly driven by the US dollar leg in the near-term. We do not expect the BoJ to provide a trigger for the yen to weaken as well at next week’s policy meeting. The BoJ is expected to leave monetary policy unchanged after unveiling their new policy framework of QQE with yield curve control at their last meeting. The initial impact on the yen from the BoJ’s decision to switch their policy focus towards targeting the 10- year JGB yield at close to 0%, and away from the quantity of monetary base expansion and asset purchases has been limited.

Bloomberg ran a report yesterday speculating that the BoJ could formally drop its reference to the annual JPY80 trillion target for monetary base expansion in the coming months according to people familiar with discussions inside the BoJ. If the yield target is viewed as credible as has been the case so far it should allow the BoJ to slow the pace of JGB purchases. The BoJ is wary that it would be interpreted as a tightening of monetary policy and encourage a stronger yen, which is why we believe that they are keeping the monetary base target in place for now. A gradual tapering of JGB purchases supports our outlook for further yen strength in the year ahead.

The BoJ will also release their latest semi-annual Outlook for Economic Activity and Prices report which is expected to reveal a downgrade to their inflation outlook. The BoJ is likely to delay again their forecast for when inflation is expected to return target beyond fiscal 2017. There has been some speculation as well that the BoJ could choose to refrain from providing a new time frame. By choosing not to announce further easing in response to the weaker inflation outlook, it would cast more doubt on the BoJ’s desire to return inflation to target as soon as possible which could weigh on inflation expectations and encourage a stronger yen. The BoJ’s recent decision to target an inflation overshoot would appear increasingly unrealistic.”