BoJ Monetary policy decision: Impact on yen rates

The BoJ is expected to maintain the current QQE at its MPM on 6-7 September. However, the industrial production index suggests Japan's real GDP in Jul-Sep 2015 is likely to either be flat QoQ or show only a slight increase, and the BoJ will likely revise its current outlook for an economic rebound from Jul-Sep. The BoJ may keep an eye on how the overseas environment, the slowdown in China and other emerging economies, will affect Japan's economy and prices for some time in the future. Since the BoJ is likely to continue the current monetary policy, rates are expected to basically follow a downward trend; however, a sharp rise in volatility is of increasing concern. JGB yields are low and stable, but could be back to unstable territory depending on the BoJ's behavior or overseas markets. 

Even if the Fed hikes rates in 2015, the upcoming rate-hike cycle may be unprecedentedly slow because the policy rate has been at zero for such a long time. Therefore the rate hike is expected to cause only a minor market shock, and forecast a 10yr Treasury yield of 2.35% at end-2015. Turning to JGB supply-demand, although there are no aggressive buyers of JGBs outside of the BoJ, the number of sellers seems to be gradually decreasing at the same time. The BoJ's expansion of QQE in October 2014 means it would 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. 

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 is believed that it will probably stick with its QE formula, and if it does opt for additional easing, options mentioned below are possible. Since the possibility to enhance JGB purchases quantitatively or qualitatively is high in that case, the JGB curve may react by bull flattening. However, at the same time, we may need to be more cautious about a sharp rise in volatility.