19 Nov 2015
No BoJ easing expected, Yen to remain weak - Deutsche Bank
FXStreet (Bali) - Taisuke Tanaka, Strategist at Deutsche Bank, notes that the Yen should remain weak even if BoJ foregoes further easing.
Key Quotes
Following the bank’s decision at its 30 October meeting not to ease further, the general market consensus is that it will keep policy unchanged this week as well.
BoJ Governor Haruhiko Kuroda remains bullish on the course of the economy and prices. If the bank were ease under such circumstances, its consistency would come under question.
Nobody in the market can completely dismiss the possibility of a surprise at the meeting given the low likelihood that the bank’s 2% price stability target will be met and the tendency of Kuroda and other reflationists to determine policy.
We believe that the conditions for another BoJ easing over the medium term are a reduction in inflation expectations, technical problems in maintaining QQE, or both. Lower inflation expectations could occur in the event of a drop in domestic demand, a slowdown in the US and greater uncertainty in China/EMs, which could easily set off a stock market downturn, falloff in commodity prices and stronger yen.
At the moment, the US economy is solid, China risk is being monitored, and share prices and the USD/JPY are firm. Japanese inflation expectations are sluggish but have not fallen to any noticeable extent.
One possible technical problem under QQE is the possibility that the BoJ will reach a point at which it is no longer able to buy its annual target of ¥80trn in JGBs in the next 1-2 years. The bank may use a number of tools to realize some sort of easing, such an extension in the duration of its JGB purchases or greater acquisition of ETF and other assets, before the market begins to discount such risk.
Given these two conditions, Kuroda may find it smarter to hold back for now on further action. Speculation of a Fed rate hike has heightened with the steadiness of the US economy, and the weakness in the yen has buoyed Japanese share prices. This would support a decision for the BoJ to keep the current QQE intact.
We maintain our belief that the BoJ will refrain from easing again for the foreseeable future and that the yen will remain weak.
Key Quotes
Following the bank’s decision at its 30 October meeting not to ease further, the general market consensus is that it will keep policy unchanged this week as well.
BoJ Governor Haruhiko Kuroda remains bullish on the course of the economy and prices. If the bank were ease under such circumstances, its consistency would come under question.
Nobody in the market can completely dismiss the possibility of a surprise at the meeting given the low likelihood that the bank’s 2% price stability target will be met and the tendency of Kuroda and other reflationists to determine policy.
We believe that the conditions for another BoJ easing over the medium term are a reduction in inflation expectations, technical problems in maintaining QQE, or both. Lower inflation expectations could occur in the event of a drop in domestic demand, a slowdown in the US and greater uncertainty in China/EMs, which could easily set off a stock market downturn, falloff in commodity prices and stronger yen.
At the moment, the US economy is solid, China risk is being monitored, and share prices and the USD/JPY are firm. Japanese inflation expectations are sluggish but have not fallen to any noticeable extent.
One possible technical problem under QQE is the possibility that the BoJ will reach a point at which it is no longer able to buy its annual target of ¥80trn in JGBs in the next 1-2 years. The bank may use a number of tools to realize some sort of easing, such an extension in the duration of its JGB purchases or greater acquisition of ETF and other assets, before the market begins to discount such risk.
Given these two conditions, Kuroda may find it smarter to hold back for now on further action. Speculation of a Fed rate hike has heightened with the steadiness of the US economy, and the weakness in the yen has buoyed Japanese share prices. This would support a decision for the BoJ to keep the current QQE intact.
We maintain our belief that the BoJ will refrain from easing again for the foreseeable future and that the yen will remain weak.