BoJ Monetary Policy's impact on yen rates

The BoJ is expected to maintain the current QQE at its Monetary Policy Meeting on 14-15 July. The BoJ may also keep an eye on how the overseas environment, the Greek situation, China's unclear economic outlook, and the decline in oil prices, will affect Japan's economy and prices. 

Since the BoJ is likely to continue the current monetary policy, still rates are expected to basically follow a downward trend; however, a sharp rise in volatility is of increasing concern. JGB yields are declining, but could be back to unstable territory depending on overseas markets. Because domestic investors reduced some of their positions during the correction and have found it difficult to buy sufficient JGBs because of the uptick in volatility, they have ample latent buying power. 

Furthermore, the BoJ's expansion of QQE in October 2014 means that it will need more sellers of JGBs than there were last year, and if no new sellers show up there is a risk of the BoJ being unable to buy JGBs according to plan (BOJ's buying ops totally depend on public funds, JGB investment activity by Japanese banks, Life insurers' JGB investment trends). On the other hand, although more than eight months have passed since the expansion of QQE, JGB yields are almost same levels as at the time (there were swings and roundabouts). If the nominal yields do not decline here on, the BoJ may need to review the effect of the expansion of QQE. 

The BoJ will likely be forced into a more cautious monetary policy if prices do not rise in accordance with its outlook. At this stage, it will probably stick with its current QE formula, but if it does opt for additional easing, given that it will be difficult for it to significantly increase the quantity of its JGB purchases and that any further declines in already low JGB yields would likely have limited impact, rather than pursue greater quantity, the BoJ s more likely to strengthen qualitatively, such as by lengthening the maturities of the JGBs it purchases, increasing its ETF purchases, and buying new types of financial assets.