Trading The BoJ: Views From 15 Major Banks
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Morgan Stanley: It's Not About Easing For JPY; Its About Inflation Expectations.
The evolution of inflation expectations is dominant for the assessment of the JPY. Hence, the BoJ’s monetary policy statement due on Wednesday must be checked in respect of its impact on Japan’s inflation expectations. -Cutting rates and redirecting QE into the front end of the JGB curve may steepen the curve, but does little to support inflation expectations. --However, lifting the BoJ’s inflation target or the MoF announcing plans to increase the duration of its liability book could help in pushing inflation expectations higher. In this case, the BoJ yield curve steepening exercise would be part of a comprehensive strategy to reflate Japan. Should the yield curve steepening just come in isolation with no hint of how to increase inflation expectations then the JPY will continue to strengthen.
Barclays: JPY Set To Rally On BoJ Inaction -
We expect no BoJ easing this week. The Bank of Japan (BoJ) MPM (Wednesday) is be the main focus of this week and we expect BoJ to refrain from the further easing this time, but the BoJ could take a more flexible stance on the time horizon for reaching its price stability target of 2% and change the annual pace of increase in its JGB holdings to JPY70-90trn from the current JPY80trn. There is a risk that the BoJ will decide to take interest rates deeper into negative territory and become more flexible in its JGB purchases, as reported by several media sources (Nikkei, 14 September 2016) or the BoJ will raise expectations for further easing. According to a survey conducted by Bloomberg on 7-12 September, 54% of the respondents forecast further easing in September, of which, 61% expected deeper negative interest rates, 57% projected an increase in longterm JGB buying, 52% looked for an expansion of the monetary base, 30% predicted more JREIT purchases and 9% expected an increase in equity-linked ETF buying. Under our base scenario of no further BoJ easing, we expect some JPY appreciation after the MPM, but we should take a note that FOMC rate announcement is on the same day. Hence, USDJPY movement could also be affected by the FOMC decision. Under our risk scenario where the BoJ eases with a focus on further cuts to negative interest rates with measures to steepen JGB curve (or raises market expectations for further easing in the future), we expect JPY depreciation pressure to strengthen, at least in the near term. In assessing the durability of JPY depreciation in such case, the balance between scope and effectiveness of further easing via NIRP versus headwinds from JPY’s undervaluation and heightened global uncertainty will be the key
BofA Merrill: BoJ To Try, Try Again; USD/JPY Bears To Win One Last Time
At its September policy meeting, we expect the BoJ to step up its support for pushing inflation up to 2%. A combination of policy innovations designed to sharpen monetary accommodation and bolster BoJ credibility is most likely, in our view. But the BoJ will need to guard against the significant risk that markets misunderstand its intentions. Analysts expect a wide range of potential outcomes from the BoJ’s “comprehensive review” to be concluded at its September policy meeting, including the possibility the BoJ effectively admits defeat and scales back its aggressive QQE program. While we are admittedly uncertain about what the BoJ is specifically likely to do this week, we believe it will continue to provide as much or more monetary support. There is a risk, however, the markets misinterpret some of the changes as a stealth tightening, and the BoJ may struggle to convince markets of its resolve. $/¥ bears may win on BoJ for one last time The BoJ meeting this week will precede the FOMC by only hours. With the Fed likely to stay put, our US strategists see the BoJ meeting as potentially more impactful to the FX market. We maintain our view that this week’s BoJ meeting is likely to be mildly yen positive.
ABN-AMRO: BoJ Near Its Limits: Limited Room Left For Aggressive Easing.
We do not think that the Bank of Japan (BoJ) has reached its limits, but there is limited room left for aggressive easing. We expect the Bank of Japan to increase its asset purchase programme by 5-10 trillion yen per year and to extend the range of assets at the Monetary Policy Meeting on 21 September. We expect the BoJ to cut the policy rates by 10bp to -0.2%. To reduce the impact for banks, the interest rate on funding through the Loan Support Program will likely be lowered to -0.2 An appropriate policy mix, including reforms in the labour market and a fiscal plan, would increase monetary policy effectiveness. Implications for USD/JPY: As our view that the BoJ is likely to lower the policy rate by 10bp is not fully priced in by financial markets, we expect the yen to decline as overcrowded speculative long yen positions are unwound. However we expect domestic investors and exporters to increase their foreign currency hedging activities if the yen were to weaken above 105 against the USD. This is expected to support the yen. Nevertheless the peak in the yen against the USD of around 100 earlier this year is probably over. This is based on our view that the Fed is likely to raise interest rates by 25bp in December. This is not fully priced in by financial markets. Hence a firmer USD is expected. Our year end USD/JPY forecast is 103.
Credit Suisse: Preparing For Another Disappointing BoJ Meeting.
Our economists are in fact expecting little to no change in policy from the BoJ at the upcoming meeting. Specifically, the spotlight next week is expected to be on the BoJ's "comprehensive assessment" of its NIRP+QQE policies. Our economics team believes this assessment will be broadly positive, pointing to improved borrowing and investment data as proof of its policies' success. In absence of a considerable change in how BoJ officials view their own policies, a significant change in said measures is unlikely. If anything, our team believes there is a small possibility of a cut in the tier 3 IOER rate from -0.1% to -0.2%, or of a slight upgrade in JGB purchase targets from JPY80tn to JPY80-90tn. In light of the large and rapid shift in expectations, we are not convinced that such changes are likely to be viewed as satisfactory relative to market pricing, especially at a time when much more aggressive policy options (e.g., direct financing of government spending on infrastructure) are being weighed in the financial press. As such, we see high potential for disappointment and continue to target USDJPY at 95 in three months.
Westpac: USD/JPY To Break Below 100 On Any Hint Of QE Exhaustion
A “QE exhaustion” signal from the BoJ is of course a vastly different proposition to an active tapering in purchases or an outright decline in the size of the BoJ’s balance sheet. The BoJ’s balance sheet is set to remain bloated for an indefinite period. That said, any hints from the BoJ that it has reached the limits of QE in its current form would nevertheless likely lead to significant dislocation in global markets – a significant decline in risk appetite and a sharp decline in USD/JPY in short order. Historical analogues point to a hefty fall in JGBs - the six largest significant declines in JGBs back to 1993 saw 10yr JGB yields rise by an average 103bp; albeit with a wide variation: +50bp to +170bp. Retail investor outflow likely slows to a trickle if not an outright reversal and net fixed income flows turn back toward more appetising JGB yields. USD/JPY would likely break below 100 in fairly short order, en route to the 90-95 zone. Such an outcome would clearly continue weighing on commodity currencies, and our preferred valuation process for short term fluctuations suggests the A$ for instance could continue to fall towards 0.72 before we view it as cheap.
Goldman Sachs: We Are Not Optimistic'; Lowering USD/JPY Forecasts
We outline our expectations for the upcoming policy meeting. We are not optimistic. Similar to the ECB, focus at the BoJ has shifted toward making the existing policy stance sustainable, as opposed to adding stimulus to meet the inflation target. A particular risk – not our base case – is that the BoJ could take steps to bear steepen the yield curve, to help the financial sector following the dramatic curve flattening since January. In our view, such a step could further compound market confusion over BoJ objectives and exacerbate the damage done to longer-term inflation expectations year-to-date. We are lowering our $/JPY forecast to 108, 110 and 115 in 3-, 6- and 12-months (from 115, 120 and 125 previously). Our 3-month target of 108 reflects our view that the BoJ will continue to ease at upcoming meetings, likely via further IOER cuts. The reduction in the 12-month forecast reflects our view that such easing is not enough to reverse the adverse dynamic that has taken hold since January. For that to be the case, more radical steps such as yield caps or price level targeting are needed, which we believe are not on the BoJ's radar screen at the present time.
BTMU: JPY Set To Spike Post-BoJ As Market Sees BoJ 'Running Out Of Options'
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.
Deutsche Bank: Risks Now Firmly Skewed In The Direction of Disappointment And A Stronger JPY
Past price action supports the idea that IF the BOJ were to pursue an ‘operation twist’ to steepen the JGB yield curve, via lower 2y yield with higher 10y yields, it will initially work in the direction of a slightly weaker JPY and support the Nikkei, and not contradict the BOJ’s other objectives to support Japan’s financial sector. Twist operations however should not be directed at FX goals. Since 2009, an average week where the curve twists steeper is 3bps for 10y - 2yr JGBs, and this has only been associated with a 0.12% depreciation in the JPY TWI. Curve manipulation should get filed in the ‘fiddling around the edges’ folder, since the overall impact on the price of money will be negligible and will not change Japan’s growth and inflation profile meaningfully. The intra-week response of a weaker yen in the face of an engineered steeper curve would almost certainly wear off quickly with the currency soon dominated by other factors. The BOJ policy assessment is bound to provide at least a few intriguing insights, but all of this should get filed in the ‘fiddling around the edges’ folder, since the overall impact on the price of money will be negligible and will not change Japan’s growth and inflation profile meaningfully. For all the earlier hope that the Fed and BOJ were both going to support USD/JPY, the risks are now firmly skewed in the direction of disappointment and a stronger yen.
BNPP: BoJ To Disappoint This Week But We Continue To Target USD/JPY At 108.
We expect the Bank of Japan to disappoint expectations for easing this week. Our economists expect no action on the Bank’s deposit rate and no significant changes to its QE program at this meeting. However, we do not expect a steady policy call to result in sharp JPY gains, particularly about 12 hours ahead of the FOMC meeting. This week, the most important factor driving USDJPY is likely to be the Fed decision and we continue to target USDJPY reaching 108 by the end of the year. However, if the Fed does disappoint our forecast for a hike, the combination of a steady Fed and steady BoJ policy would likely see USDJPY test back below 100.
Credit Agricole: BoJ to Re-steepen JGB curve; Inflation Target Key
We expect the BoJ to announce policies to re-steepen the JGB curve and thus push long-term yields higher still.---Despite the BoJ’s ‘comprehensive assessment’ of monetary policy, a recent Bloomberg survey showed only 53% of economists expect the BoJ to announce further easing measures at the September meeting (in some form or another). This expectation is distinctly lower than the 78% of economists that were expecting further easing at the July meeting this summer. But to call for a “comprehensive assessment” of monetary policy and then do nothing would be counterintuitive, and it would certainly erode the credibility of the BoJ in our view. It could also look dangerously like the BoJ is ‘waving the white flag’ on trying to reach its inflation target. No action by the BoJ tomorrow would likely be a disappointment for investors. It could look dangerously like the BoJ is ‘waving the white flag’ on trying to reach its inflation target. The impact on the USD/JPY would likely be negative as the Nikkei would likely head lower and our research shows that the main driver of the USD/JPY post BoJ meetings is the reaction in the Nikkei. Outside of the adjusting the policy rate and asset purchases, the BoJ could also change the wording on its inflation goal. Currently, the Board aims to get headline CPI inflation to 2% at the earliest possible time. There are some analysts calling for adjustment to the time horizon for reaching the goal or even the goal itself such as changing it to core inflation. Any “watering down” of the inflation goal would be viewed negatively by the market, in our view.
Citi: USD/JPY Set To Fall Even If BoJ Increases JGB Purchase
CitiFX Strategist Osamu Takashima thinks the event risk of this week’s BoJ meeting for USDJPY will be on the downside.Given not crowded JPY shorts, it won’t fall below the recent low of around 99 this month. However, there is the risk the pairing could then test the next critical level of around 95 before year-end. He says, “Based on a survey that the investor sales in Citi Tokyo conducted with Japanese investors (more than half was equity investors) last week, about 48% expects the BoJ to take action this week while 45% doesn’t think so. Most of them believe the action could be an IOER cut and/or modifying JGB purchases (shorten the average duration and/or shift to more flexible purchase like the band target of JPY 70-90tn). On the other hand, those who expect the increase in the asset purchase are less than around 15%. So, the QQE reinforcement could be a surprise for the markets, but if the BoJ were to actually increase JGB purchase, currently JPY 80tn annually, it can deepen the market’s concern that the Bank’s purchase could face the limit and the unintended technical tapering could happen sooner than presently thought. Therefore, we think the JGB purchase increase is not a good way for the BoJ to take so as to cast away the markets’ skepticism for its capability. Even in this case, USDJPY will eventually break the 99-100 support and decline towards 95.
Nomura: No Change To Rates, Likely To Steepen Yield Curve.
For interest rates, we think the BOJ will make no change to either the interest rate on the policy-rate balance portion of current accounts held by financial institutions at the BOJ or interest rates on loan support operations. We also think the BOJ will make no change to the quantity of JGB and other purchases. We now expect the BOJ to make fresh efforts to steepen the yield curve by removing the rule that limits the average remaining maturity of its JGB purchases to 7–12 years.
Danske: BoJ To Disappoint But USD/JPY Won't Significantly Break Below 100
We do not expect the BoJ to ease monetary policy. However, we expect it to adjust its policy framework by abandoning its calendar-based communications on when it expects to reach the 2% target and instead pursue 2% inflation ‘at the earliest possible stage’. Moreover, we expect the BoJ to maintain its negative interest rate policy and keep the door open for additional rate cuts in the future while adopting a more flexible approach to its quantitative target for JGB purchases. In our main scenario, we expect the BoJ to disappoint relative to market pricing at the 21 September meeting, suggesting that USD/JPY is likely to trade lower in the very near term. Given the market’s low expectations for further Fed rate hikes, short-term valuations and positioning, we expect JPY appreciation pressure to lose momentum, and in the absence of a sharp deterioration in risk sentiment and/or substantial declines in crude oil prices, we do not expect USD/JPY to break significantly below 100.
RBS: QE Amount The Most Critical Piece Of The BoJ Puzzle For FX Markets.
In the FX space, speculation around the Bank of Japan’s policy decision has been much more prevalent in the global rates market than it has in USD/JPY. We think that a policy stance that would be more clearly targeted at the front-end, via rate cuts and asset purchases, and encourages a steeper JGB curve is in part designed to encourage a weaker JPY. But the strong correlation between the global safe-haven sovereign bond markets has contributed to similar moves in other bond markets, limiting the impact on bilateral rate differentials. In fact, the trade-weighted JPY has actually risen since the end of August even as BoJ expectations have risen. FX markets appear much more downbeat on the prospects of a USD/JPY rally beyond the immediate reaction. After being disappointed by a lack of follow-through in USD/JPY in January, April, and July of this year, that hesitation seems warranted this time around. As our London colleagues note in their weekly, FX markets may be responding more clearly to the broader risk environment that has accompanied the recent rate move than they have to the rate move itself. If that remains the case, USD/JPY may be ultimately driven more by the risk environment prevailing through and after the event rather than the specifics behind the BoJ’s program, despite their best efforts to target policy more specifically at a weaker JPY. For that reason, we think the most critical piece of the BoJ puzzle for FX markets may be the total amount of QE. A commitment to lift all boats (even if it lifts some long-end boats less than other front-end boats) may be the chief factor to assuage the market’s primary “risk off” concern through the BoJ – that the BoJ and its peers are either running out of ammunition, need, or desire to use asset purchases as a primary tool of monetary policy.
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