No further easing as BoJ softens its forward guidance

The Bank of Japan (BoJ) kept its policy unchanged at the 30 October meeting and once again extended the timeline for achieving 2% inflation from H1 FY16 (April-September 2016) to H2 FY16 (October 2016-March 2017). 

At the same time, the BoJ slashed its core CPI forecast for FY15-16, even after accounting for the effect of energy, along with a downgrade of the growth forecast for FY15. Given the softening of its calendar-based forward guidance, no further easing is expected at this stage. 

"According to Barclays, more may be considered in risk events, for instance: 1) the USD/JPY falls to 110-115; 2) wages slump to the extent that it changes the BoJ's price outlook; or 3) there is an incentive/pressure from the government to take coordinated policy action ahead of the July 2016 Upper House election.

Muted market reaction suggests that easing expectations had largely abated prior to the BoJ meeting, likely due to political comments suggesting no easing and upside surprises in industrial production data. 

Meanwhile, the Nikkei newspaper (right after the BoJ statement) reported a potential fiscal stimulus of more than JPY3trn, which drove Japanese equities (and USD/JPY temporarily) higher.

This week, market attention will turn to global factors, including the Fed policy outlook and general risk sentiments, given a lack of major data/event in Japan (Tuesday is a public holiday). 

"Fluctuations in global risk sentiment remain an important driver of the JPY, particularly as some of its appreciation since August has been unwound with the market focus shifting from EM growth concerns to DM monetary policy easing", added Barclays. 

A further pricing of a December Fed hike and/or a continuation of the benign risk environment should be supportive for USD/JPY. On the other hand, disappointing US data or deterioration in risk assets would weigh on USDJPY, especially as further BoJ easing now seems less likely.