In Japan, the focus next week will be on the Bank of Japan’s (BoJ) monetary policy meeting on 27-28 April. Pressure on the BoJ to ease monetary policy is mounting as USD/JPY has declined more than 10% since the beginning of the year, while the nominal effective JPY exchange rate has increased to 2013 levels. 2016 is proving to e a very challenging year for the BoJ, as the JPY has been carried forward in recent months by what could be viewed as a perfect storm for the currency. Besides the recent strengthening of the JPY which is putting further downward pressure on inflation and inflation expectations and erodes confidence in the bank, a weaker economic outlook implied by both the PMI and Tankan surveys and a likely technical recession in Q1-Q4 are also supporting the case for additional easing.
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We expect the BoJ to cut its policy rate by 20bp to -0.3% in connection with its monetary policy meeting ending 28 April.Moreover, we think it is likely that the BoJ may focus on qualitative measures such as scaling up ETF and J-REIT (real estate investment trusts) from the current JPY3trn and JPY90bn, respectively, in order to optimise its asset purchases. Pricing in the Japanese money market implies only a little probability of a rate cut in April, while the overnight interest rate is priced to fall to -0.25% in November 2016. In relation to the yen, a stretched long JPY positioning combined with USD/JPY being oversold according to our short-term financial model, implies that a BoJ rate cut could have an effect on USD/JPY this time around. Moreover, the relatively dovish pricing of the Fed, which currently implies around 15% probability of a June hike (40% in September) and only 55% probability of a hike by the end of 2016, indicates that headwinds stemming from relative rates are likely to ease. We look for a stabilisation of USD/JPY above 110, targeting the cross at 112 in 1-3M.