FX Flash – BoJ ‘inaction’ – JPY strengthens

by: Roy Teo

JPY surge after BoJ ‘inaction’

The Japanese yen (JPY) surged to below 103 against the US dollar after the Bank of Japan (BoJ) left the policy rate (7-2 vote) and monetary base target (8-1 vote) unchanged today. This disappointed market expectations that the BoJ will lower policy rates and increase the size of its qualitative and quantitative easing programme. However the BoJ voted 7-2 to expand its target for ETFs purchases to 6 trillion yen (from 3.3 trillion yen) and doubled the US dollar lending program to USD 24bn. Under this lending program, the BoJ will provide US dollar funds for a period of up to 4 years to support Japanese firms’ overseas activities through financial institutions. The BoJ will also establish a new facility in which it lends Japanese government securities to financial institutions against their current account balances with the Bank so that these securities can be pledged as collateral for the US dollar funds operations. The BoJ said that they will conduct a comprehensive assessment of the economy at the next monetary policy meeting on 21 September.

 

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Kuroda passes baton to Abe

The BoJ maintained their view that inflation will reach around 2% during fiscal year 2017 due to effects of economic stimulus measures. However the projected rate of increase in inflation is lower for the current fiscal year 2016. This is due to the appreciation of the yen. Nevertheless, the output gap is expected to move into positive territory at the end of fiscal year 2016. In our view, today’s ‘inaction’ by the BoJ has two messages. The BoJ has implied that there are limits to further increasing the size of JGB purchases and lingering concerns that more negative policy rates could backfire. Hence the BoJ has passed the baton to the government to take strong bold fiscal measures and reforms to stimulate the economy.

 

Fiscal stimulus a bazooka?

Earlier this week, it was reported that a fiscal stimulus package of 28 trillion yen (6% of GDP) could be passed on 2 August. This is significant. However we think that new actual spending this year is likely to be much smaller (different sources quoting 2 to 9 trillion yen range) with the total stimulus package including planned expenditure over several years.

 

USD/JPY downside risk towards 100

In the absence of a bazooka fiscal stimulus announcement next week, we think that it is more likely that the yen will strengthen towards 100 rather than weaken to the recent lows of around 107.50 against the US dollar. Our third quarter target for USD/JPY is 100.