The yen will spike because the BOJ is out of options
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While the Fed will express caution over rate increases on Wednesday, just prior to that on the same day, the BoJ may well be perceived as being cautious over easing monetary policy further. The announcement comes in a holiday-interrupted week with a holiday today and Thursday. While a few weeks ago, expectations of a key policy announcement were high, some of that has eased back somewhat.
We continue to see the BoJ holding off on Wednesday while stressing that policy options for easing monetary policy remain.Reports suggest the MPC is split with Governor Kuroda and his deputy Governors leaning in favour of further rate cuts while others maintain their faith in monetary base expansion through asset purchases.
Our sense is that market expectations of a shift away from a stringent asset purchase target is most likely but ultimately a decision on Wednesday to keep policy unchanged will merely reinforce the belief in the market that the BoJ is running out of options and the short-term response will be a further lift for the yen.
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