Little chance that the BoJ will consider further easing – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, notes that the general perception is that the BoJ will not retreat from its easing stance; may deepen its negative interest rate policy (NIRP); will allow a steepening of the yield curve; will not buy foreign bonds; will maintain its 2% price stability target but abandon a fixed deadline; and indicate a new monetary policy framework for a protracted war against deflation.

Key Quotes

“However, we see little chance that the BoJ will consider further easing action such a rate cut. Our economists feel that Japan has already entered a cyclical recovery phase and that another easing could prompt expectations of gradualist action by the BoJ. Its available options are limited, and it presumably will want to avoid using those prior to the FOMC meeting later the same day.

If the BoJ refrains from easing action and the Fed from another rate hike tomorrow, as we are anticipating, the USD/JPY may come under downward pressure (though they are likely to leave open the possibility action within the year). We believe the upside for the USD/JPY would remain capped by selling orders by Japanese hedgers. At the same time, any significant drop below ¥100 could bring the floor to the mid ¥90s or lower.

We do not feel that the BoJ has any bazookas in its arsenal to shock the markets even if it were to ease tomorrow. As we have already seen this year, a BoJ easing is unlikely to have any sustained downward impact on the yen if the US economic momentum is wanting. If it forces through action at a time when the markets have only priced in a 20% probability of a Fed rate hike, we believe it will only trigger volatility in risk markets and have no sustained bullish impact on the USD/JPY.

The USD/JPY has been losing self-fulfilling correlation with 2y yields or quantitative easing. We believe the downward effect on the yen would be short and shallow in the case of either or both a BoJ easing and Fed rate hike. If this should be the case, we would recommend selling USD/JPY on the rally. We reiterate our forecast of ¥94 at end-2016.”