BoJ: More Carrot, Less Stick - RBS
James Nelligan, Research Analyst at RBS, suggests that in order for Bank
of Japan to over deliver in the eyes of markets, it may need to
materially reduce the expected lower bound on the deposit rate.
“Kuroda has said the lower bound is at least -0.4%. But medium term that will not be sufficient to durably weaken the yen, we believe. Last week, Bank of Japan hinted it could lend to banks at negative rates, possibly offsetting adverse effects of negative deposit rates on bank earnings profitability, allowing the lower bound on the depo rate to be potentially much lower. Only 23 out of 41 surveyed analysts (source: Bloomberg) are expecting a monetary stimulus expansion and CFTC positioning data showing the market at record long yen levels.
Most immediately, we favour USD/JPY longs into the policy meeting with a run up perhaps towards 115. However, if the overall policy mix is deemed to have shifted more towards domestic demand, then the JPY could appreciate sharply again multi month. Most important for FX here is not so much the depo rate cut next week, but the guidance on further cuts.
Meanwhile, we believe Bank of Japan must deliver easing on several fronts to avoid disappointing markets. We expect an increase in JGB purchases, an increase in ETF purchases and a cut to the deposit rate. A TLTRO style programme announcement is on the table we think, but the decisive factor for FX will be whether it is aimed at domestic demand or the yen. Another significant risk is how the central bank over delivers having already dripfed the market with possible easing moves. Most impactful policy surprises are rarely preannounced.”