No Further BoJ Cuts Unless USD/JPY Falls Below 95 - BNPP
In Japan, Governor Kuroda indicated he expected the pace of JGB purchases and the shape of the yield curve to remain broadly stable. Further easing, if needed, would be accomplished via further cuts to the deposit rate.
Our economics team does not expect further rate cuts unless USDJPY were to fall below 95. Given this, the USD continues to depend on Fed tightening to regain momentum, a dynamic unlikely to resurface until late in Q4.
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Japanese Prime Minister Abe, speaking from parliament Tuesday, said there is no need to rethink the Government Pension Investment Fund (GPIF) portfolio. Some market participants had previously expected the GPIF to reverse their shift into foreign assets from October 2014, while some have also argued they are likely to shift to an even higher weighting of foreign assets in sympathy with the aims of a weaker JPY.
Our view is that the key point regards the GPIF is how much of their FX exposure they are now aiming to hedge. In April this year, the newly appointed President, Norihiro Takahasi, said that they are now using some currency hedging in EUR and USD. The size of these flows is very large – for every 1% of their stock of foreign currency risk, they need to buy approximately USD 4.5-5bn worth of JPY.
