At the Monetary Policy Meeting (MPM) of 28-29 July, the BoJ decided to ease monetary policy further.
As we forecast, annual ETF purchases were almost doubled from the current ¥3.3trn to ¥6trn, by a 7-2 vote. Also, in order to ensure smooth funding in foreign currencies by Japanese firms and financial institutions, the BoJ increased the size of its lending program to support growth in USD from $12bn to $24bn and established a new facility for lending securities to be pledged as collateral for the US Dollar Funds-Supplying Operations. These measures were passed by a unanimous vote. The status quo was maintained in other asset purchasing operations and interest rates.
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In its Outlook for Economic Activity and Prices (Outlook report), the BoJ lowered its FY16 growth forecast by 0.2ppt from April to 1.0% and raised FY17 growth from 0.1% (April forecast) to 1.3% on the grounds that postponement of the planned consumption tax rate hike would eliminate the anticipated demand surge before the tax hike, and the government’s fiscal stimulus may support economic growth. As for the price outlook, the BoJ lowered its FY16 CPI forecast from 0.5% to 0.1%, but maintained its forecasts for FY17 and FY18. It still expects to reach its price stability target of 2% in FY17.
The most notable fact about today’s meeting results, however, is the addition of this sentence to the BoJ’s statement: “The Bank will conduct a comprehensive assessment of the developments in economic activity and prices under ‘QQE’ and ‘QQE with a Negative Interest Rate as well as these policy effects at the next MPM. The Chairman instructed the staff to prepare for deliberations at the next meeting.” Up to now, Governor Haruhiko Kuroda has given the market a number of surprises and has worked on expectations that way. His reference to the next MPM will probably generate a variety of speculation and may be interpreted as forward guidance to the market though where the BoJ is trying to guide is unclear. The September meeting (Sep 20-21) may become a volatile event.
No change to our market view yet: JPY strength to persist before JPY weakness return in 2017
In our BoJ preview report, we expected “the sell-on-rally market to prevail into autumn in either scenario of strengthening QQE, possibly accompanied by a rate cut (main scenario) or inaction (risk scenario) upon confirmation of no helicopter money (tail risk)” though “USD/JPY could converge to the low volume environment to await more global catalysts” given low volatilities outside the JPY space While Kuroda’s instruction could support market sentiment, it is unlikely to be able to fend off potential pressure for yen strength if it materializes as uncertainties are very high about what could come out of the September meeting. From the long-term perspective, though, if the BoJ is able to strengthen the sustainability of the existing QQE and negative interest rate program, which should be currency negative when external economies can absorb deflationary pressure, even at the cost of near-term adjustment, it will probably support our core view that JPY strength will persist into autumn but yen’s structural weakness returns in 2017E ($/¥ close to the bottom, but global risks to deepen the downside into autumn 26 June 2016).
We anticipated that USD/JPY would go through a technical rebound up to 110 after the Brexit result, and, in our view, this rebound has ended. USD/JPY’s potential break below 100 into autumn, as we expect, would provide a great buying opportunity. However, we note significant uncertainties heading into the September BoJ meeting.