(25 September 2019) DAILY MARKET BRIEF 2：BoJ easing becomes clearer

By Vincent Mivelaz

Things are becoming a little clearer In Japan. Not only does the release of August inflation data pointing to a slowdown in momentum, but the release of the Bank of Japan Minutes from July monetary policy meeting also confirm that further easing should be expected starting from October, with a few mechanisms at its disposal. Additionally, the postponement of a formal signed trade deal by both the US and Japan, currently under legal review, should maintain uncertainties high as the economy continues to face downward pressures. While details of the deal should be disclosed during the US – Japan summit at the UN General Assembly today, investors will be carefully looking at the concluding joint statement and whether Washington is willing to sign a written consent that pledges not to introduce tariffs on Japanese vehicles and auto parts nor quota. In this circumstance, the BoJ is likely to wait for the latter in order to implement a thorough economic assessment and ultimately decide on additional stimulus.

In its July policy minutes, the BoJ confirms that it is ready to ease further in order to preempt risks that would put negative pressures on Japan’s inflation target of 2% while it is considering the use of four policy tools in order to achieve its goals, including: a deepening into negative rates, a cut in 10-year yield target, an increase of asset purchases and a rise of money printing. Yet the options appears rather limited to support sustainable easing. Furthermore, the release of August headline and core inflation printed at 0.30% (prior: 0.50%) and 0.50% (prior: 0.60%) seems to confirm that a loss in momentum is confirmed, suggesting that additional easing should occur soon. In New York, Japanese Foreign Minister Toshimitsu Motegi still hopes that the United States will deliver a promise on tariff threats to the automotive sector, although a "sunset clause" consisting of a withdrawal from the trade agreement associated with potential US taxes on Japanese auto should be included in the next signed pact. Despite the limited amount of information related to the deal, Japan should lower existing 38.50% tariffs on US beef imports in stages to 9%, certainly at better conditions than in the multilateral Trans-Pacific Partnership terms.

Currently trading at 107.32, USD/JPY is expected to head along 107.40 short-term.

BoJ easing becomes clearer