The BoJ will try boosting domestic inflation expectations at its policy meeting this week, notes Morgan Stanley.
"We project a 20bps cut, but with Japan’s banks predominantly funded via deposits it will be the inflexibility of deposit funding costs via retail accounts undermining banks profitability further. Hence, the JPY weakening impact coming from this side should be limited," MS projects.
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"Bloomberg is reporting the BoJ's increasing importance as a shareholder within domestic markets, claiming that,via its ETF purchases, the BoJ is now a top 10% shareholder for 90% of the 225 companies listed in the Nikkei.
Under the current stimulus plan the BoJ buys JPY3trn of ETFs every year. At an estimated JPY8.6 trn as of March, the BoJ's holdings amount to about 1.6% of the total capitalization of all companies listed in Japan. That compares with about 5% held by the nation’s Government Pension Investment Fund (GPIF)," MS add.
"Should the BoJ announce an increase of its ETF purchase program then we would sell USDJPY into strength," MS advises.
"BoJ's equity market intervention does not generate a JPY weakening flow going beyond initial de-hedging of equity positions via FX instruments. Abe’s ruling party winning a closely fought by-election on the northern island of Hokkaido on Sunday is a positive factor ahead of an upper house election expected in July," MS adds.
Hence, MS thinks that an anticipated USD/JPY move to 112.50 post-BoJ should be viewed as a correction within a longer-term bear market and should provide a good selling opportunity accordingly.