BoJ: Pressure Mounting to Ease Further - ING
Research Team at ING, suggests that the pressure has increased on the
BoJ to deliver some form of stimulus at the 28 April meeting.
Key Quotes
“The
economic case for easing is clear, so the two main questions are (a)
what options do the BoJ have and (b) can these measures reverse or even
stem the JPY’s current upward trend.
BoJ option 1: Increase purchases of risk assets (corporate bonds, ETFs)
Purchases
of JGBs are now perceived to be impractical, thus any QQE-expansion
must come from alternative risk assets. The BoJ’s scope to buy
additional existing ETFs is limited (hence why in Dec they chose to
jump-start creation of new ETFs). Purchases of corporate bonds look more
feasible; while the BoJ is currently buying these to maintain holdings
at ¥3.2tr, we estimate that there are ≈¥9tr of eligible bonds in issue
and not held by the BoJ. There are other alternatives too (e.g. local
government bonds), but crucially, all of these markets are small and
hence the direct impact would be negligible.
BoJ option 2: Cut interest rates further into negative territory
January’s
decision is still unpopular amongst the public and the market
ramifications are still being felt. Yet, we feel that this is the BoJ’s
most potent instrument and if they wanted to “shock and awe”, a depo
rate cut would ultimately have to be involved given the lack of
alternative “bazooka-style” instruments. Yet, the BoJ could find itself
trapped in a vicious circle; if markets still perceive lower negative
rates to be destabilising to the financial sector (as some board members
alluded to in March), then the ensuing risk-off sentiment may
counterintuitively exacerbate JPY strength.
Overall, the BoJ may well find itself between a rock and a hard place should JPY strength persist ahead of the 28 April meeting.
With intervention unlikely this side of 105, the BoJ’s biggest
challenge will be to deliver a stimulus package that does more good than
harm. Getting it wrong could prove costly in terms of fuelling JPY
upside.”
(Market News Provided by FXstreet)
