The Japanese yen's safe-haven appeal is in high demand in start of 2016 after China's central bank devalued its currency again, creating even more uncertainty among investors. The USD/JPY cross was trading 0.43% lower at 117.95 on Thursday morning in Tokyo from 118.48 where the pair had closed on Wednesday, sliding as low as 117.66 after the PBoC set the Yuan rate, the weakest since February 2015.

In general scenario, local currency strength may not be especially welcome by the particular country, but we suspect that Policy makers may be unable to avoid it. It is most likely that BOJ neither change QE nor expand in 2016. Political pressure also plays an important role for a weaker JPY.

BOJ's QE programme will become an important theme in 2016 as the supply of bonds available for BoJ purchase begins to dry up. Even if we take another supposition that the BoJ merely maintains the current QE pace at JPY80tn of purchases per year, we estimate that the limits of QE will be reached by the end of 2016. In addition, the risk of undersubscribed BoJ bond auctions is likely to increase during H2 16 when portfolio rebalancing by key JGB holders will be largely complete.

Another hurdle for QE expansion is the economic scenario for growth and inflation targets to be achieved in current year. BoJ repeatedly announcing that the Inflationary trend is on track with policymakers taking particular steps to achieve the economic targets.