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Ahead of Wednesday’s BoJ meeting, which we expect to be more material than the Fed conclave on the same day, we discuss why tweaks to the BoJ’s easing program can extend these moves and deliver yen strength.
The outcome of Wednesday’s BoJ meeting is highly uncertain but those expecting a step-change in policy are set to be disappointed.
We expect the BoJ to reiterate its commitment to achieving its 2% inflation target at the earliest possible time while admitting that a combination of international drags and depressed inflation expectations will keep inflation subdued over the coming year.
It will also defend its policy framework, arguing that the benefits of low real interest rates outweigh the costs. Based on this assessment, we look for four concrete policy steps.
First, rates will be lowered to -30bp.
Second, Kuroda is likely to use the press conference to emphasize that the BoJ could cut rates further, to at least -70bp. Our forecast pencils in a move to -50bp sometime next year.
Third, the headline sentence of the statement will announce a JPY90tn rise in the monetary base over the coming year (from JPY80tn).
Fourth, we look for a shift in the asset purchase program toward reinforcing efforts to steepen the yield curve. To this end, the increase in asset purchases will involve corporate, local government and FILP bonds.
JGB purchases will be held at JPY80tn, with a greater focus on below-10-year maturities.
Since the Bank of Japan’s (BoJ) last meeting USD-JPY has been keeping above the 100 mark. That makes one thing clear: the announcement of a “comprehensive assessment” of its monetary policy on the part of the BoJ fuelled the expectation of further expansionary measures and has thus been able to stop JPY’s appreciation trend recorded since the start of the year.
Roll expired USDJPY put fly into a 6-week at-expiry digital put on CADJPY given upside risks for JGB yields and the yen from a BoJ that could acknowledge the dark side of QE.
