BoJ: Minimum response a resolute decision – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, suggests that the BoJ’s decision disappoints at first glance, but preserves monetary policy independence and room for additional easing

Key Quotes

“The BoJ decided to increase its ETF purchasing program to ¥6trn per year. The market had already factored in additional easing via an expansion of its NIRP, as well as increases in ETF and REIT, and JGB purchases. From this perspective, decision was close to the minimum expected additional easing.

On the other hand, we could view the decision as a wise and courageous response. With the BoJ under political pressure to ease further in conjunction with the government’s fiscal stimulus plan, implementing a wide range of easing measures could have left it with little room to move in future and raised concerns about the political impact. Though this might have temporarily weakened the yen and boosted stocks, any lack of further action once this trend reversed would have invited serious disappointment.

For the next meeting on September 20-21, BoJ Governor Haruhiko Kuroda has reportedly ordered a general assessment of their policy measures. Though it is questioned that they have not always done this sort of thing, at least it has preserved its leeway for additional easing until September.

For the September meeting, we are not only questioning what it will do in terms of cooperation after reviewing the fiscal stimulus measures, but also the state of its basically meaningless 2% inflation target. The BoJ may offer some kind of forward guidance on the sustainability of the current QQE policy.

Policy decision completely disappointed expectations, but the initial reaction of the USD/JPY was not that negative as the rate was also supported by the weaker demand for selling by hedgers after the recent rise. In addition to bank stocks rebounding on the postponement of expanding the NIRP, increasing ETF purchases pushed the Nikkei 225 up, which helped restrain yen appreciation.

However, in our view, the USD/JPY remains on a bearish trend, and has again shifted back to the 100 to 105 range. Unless the rate is supported by a succession of strong US data releases, and from a technical perspective as well, we think that the USD/JPY will continue to trend in a range that leaves it vulnerable to downside risk that could take it to 100 or lower.”