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.
Key Quotes
“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).”
