Mansoor Mohi-uddin, Strategist at RBS, suggests that the Bank of Japan and the Ministry of Finance still seem reluctant to resort to helicopter money this year to spur inflation.
Key Quotes
“Instead, the BoJ is set to act at least once more under its Quantitative and Qualitative Easing with a Negative Interest Rate. Financial markets are increasingly expecting action when the BoJ meets in the week ahead.
Dollar-yen has retraced its plunge from 106 to 99 after the UK’s EU vote and the Nikkei has rebounded from 15,000. Thus the risk of no action by the BoJ this month would likely push the exchange rate back towards 100.
We think, however, Governor Kuroda will not disappoint this time as the BoJ did in April when leaving policy unchanged. First, the BoJ should at least double its ¥3.3trn annual ETF purchases and could potentially treble or quadruple its buying. Second, the BoJ is set to follow the ECB and allow banks to borrow at negative rates by cutting its lending rate to -0.10%. Third, the BoJ may also cut its deposit rate again from -0.10% to -0.20% to show it can still pursue negative rates further.
The risk of further BoJ easing plus the Fed’s tightening bias suggests dollar-yen will trade back to 110-120 in H2’16.”
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