BoJ Preview: Clouds Gathering - ING
James Smith, Economist at ING, suggests that given recent JPY strength,
we expect the BoJ to expand stimulus this week, via increased risk asset
purchases and a move to negative rates on the Loan Support Programme.
“However, we feel that the BoJ may increasingly struggle to influence JPY price action, even if next week’s stimulus package is received positively.
Economic risks are building, not least from the recent JPY strength. On a trade-weighted basis, the Yen is now over 6% stronger than it was pre-negative rates. In fact, below 110, USD/JPY is trading at a level below what 42% of firm’s consider to be their breakeven rate. For growth and inflation, the key now is the persistence of JPY strength. The challenge for policymakers is now to try to halt any further JPY appreciation.
FX intervention remains unlikely, so pressure on the BoJ to act is building.
We think that the BoJ essentially has four options
1) Increase purchases of risk assets. Expanded JGB purchases remain challenging from a technical standpoint. Thus, the most obvious choice would be to expand ETF purchases, although we feel that the BoJ’s ability to do this decisively is limited (further purchases rely on jump-starting ETF creation). Expanded corporate bond purchases seem more feasible – we estimate that there are ≈¥9tr of eligible bonds in issuance, not held by the BoJ. The issue with all of these markets is that they are fairly small, so the impact could be limited.
2) Cut rates further into negative territory. Although theoretically the BoJ’s most powerful weapon, we think that policymakers will be wary of triggering risk-off/further JPY strength, given that negative rates are still unpopular with markets.
3) Apply negative rates to the Loan Support Programme. This is a fairly low-hanging fruit for the BoJ – allowing banks to borrow at negative rates would theoretically encourage lending. Although realistically, this is unlikely to substantially boost growth, it would be perceived as positive for banks and would probably be received well by markets.
4) Launch Helicopter Money. Although widely-discussed, there are legal hurdles that need to be overcome if this policy is to become reality. We think that Japan is still some way from going down this path, although is still perhaps the closest out of any DM economy to making this uncharted step.
We expect a combination of 1) and 3) above, as these are the most market friendly. That said, we feel that the BoJ may struggle to influence JPY price action as recent moves were in part driven by factors beyond the BoJ’s control (eg, USD weakness).”