BOJ: Clear risk Oct meeting to disappoint for JPY bears


FXStreet (Bali) - Jane Foley, FX Strategist at BoJ, notes that while her core view is that the BoJ will have to ease further this cycle, there is clear risk that October may bring a disappointment for JPY bears.

Key Quotes

"The market, however, is far less optimistic. Recent economic data releases have shown weakness in production, trade, retail sales, vehicle sales, machine orders and inflation data."

"At the October 30 policy meeting, the BoJ is expected to revise lower forecasts for both activity and inflation and many market participants expect the Bank to sooth these announcements with an increase in QE. An increase in the asset purchase programme, however, may not be straightforward."

"The minutes of the August BoJ policy meeting state that “one member said that the additional effects of QQE had been diminishing and such effects from even the initial scale of QQE had already been exceeded by the side effects."

"This member pointed out the following as the side effects: (1) a build-up of financial imbalances; (2) the impact of the Bank's asset purchases on liquidity in the JGB market; and (3) the possibility that the Bank's profits would be reduced in the course of normalizing monetary policy, which could impair the Bank's capital or increase the public burden.”

"Currently, the BoJ purchases JGBs so that their amount outstanding will increase at an annual pace of about Y80 trn. Even amongst those who believe that the BoJ has no choice but to extend QQE, there are fears that the size of the programme has become so unwieldy as to necessitate some change in tack."

"Also arguing in favour of steady policy on Oct 30 is the BoJ observation that the “real effective exchange rate of the yen has depreciated to the level last recorded in 1973”. Why we expect that the BoJ will have to ease further this cycle, there is clear risk that October may bring a disappointment for JPY bears."

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