“Although Japanese yields have been declining since the BOJ’s introduction of a negative rate policy, the market sees a much lower chance of a Fed rate hike this year, depressing the rate spread between the US and that of Japan.
We do not think there is a high probability of US recession at the moment, but the market prices only a marginal possibility of a rate hike by year-end (around 20%), while pricing out the chance of a March rate hike almost completely. Market expectations for a Fed hike look too pessimistic now.
JPY long positions at IMM were unwound after the BOJ surprise on 29 January, but we estimate JPY long positions to be now at a higher level than before the BOJ meeting.
As JPY appreciation accelerates, Japanese policymakers commented on the FX market overnight. Finance Minister Aso said movements in markets have been rough and he will continue to watch FX market movements closely. In addition, Vice Finance Minister for International Finance Asawaka also said FX moves have been rough and he is watching the market. Economy Minister Ishihara said a weak JPY that boosts capex is positive for the economy, while he is going to monitor the equity market. These comments suggest the MOF is not necessarily going to intervene in the FX market anytime soon, but their concerns over recent price action in FX and equity markets are high.
Our economists expect the BOJ to ease in July again, but the possibility of an earlier easing cannot be ruled out, in our view. Japanese policymakers’ stance on FX remains JPY negative as USD/JPY is trading around 115, which is an important level for Japanese exporters.”
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