BoJ opts to keep ammunition:
At the Monetary Policy Meeting of 27-28 April, the Bank of Japan (BoJ) decided to keep its policy unchanged despite downward revisions across the board and another delay of projection of when its 2% price stability target would be achieved from around 1H FY17 to during FY17 (Chart of the day). In our view, the BoJ opted to keep its ammunition rather than meeting market expectations in this very difficult situation of damned if you do and damned if you don’t. While we expected the BoJ to opt to meet market expectations, the decision to stay on hold is also understandable.
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The dollar’s 100 yen risk amid weaker policy put:
In a sense, the BoJ avoided the risk of depleting its ammunition or what could be rather market-negative piecemeal measures, but unavoidably sent the message that it will withstand stronger JPY and weaker equity prices. In fact, we have thought since before negative interest rates were introduced in January that the BoJ would have difficulty reversing the downtrend in USD/JPY on its own and it faces the damned if you do, damned if you don’t situation. From that perspective, the Bank's decision to stay on hold yesterday is understandable. True, market expectations may last into the BoJ's June meeting ahead of the Upper House elections as well as the July meeting, when the next Outlook report will be released. The Government also plans to unveil new economic measures around the May G7 Summit to be held in Japan.
However, the BoJ’s inaction this week has probably weakened the already-softening policy put and lowered the level from ¥110 to ¥105.
Pressures to sell on rallies at ¥110/US$ or higher will likely build and Japanese equity will probably follow USD/JPY as the macro-driven market persists. USD/JPY is not absolutely undervalued in our view, while global macro conditions are by no means positive for risk sentiment and USD/JPY.
With the BoJ accepting stronger JPY, we maintain our view that USD/JPY would gravitate toward 100-105 before bottoming out.