BoJ preview - what to expect in USD/JPY?

USD/JPY took a hit in early Asia ahead of what could be either a huge disappointment in the markets from the BoJ or satisfying the Yen bears with the BoJ pulling out all of the stops to likely appease the government and equity markets.

There has been the speculation of "helicopter money" on the cards, but the Yen was supported recently as participants were reminded of BOJ Governor Kuroda's June comments noting the BOJ purchases of bonds directly from the government was banned, just like other major central banks. Such policy would involve new fiscal and monetary stimulus and in its extreme form, there raises the concept of helicopter money, which had coincided with Bernanke's recent visit to Tokyo, raising such suspicions. However, no laws were changed in that respect prior to today's and forthcoming meeting.

BoJ has to pull something out of the bag, and not just a proverbial rabbit this time

However, the point is, the BoJ will struggle to re-weaken the yen on a sustainable basis unless it makes some form of “helicopter money” announcement as just repeating more of the same will be a disappointment to the markets. Nonetheless, the headline numbers for the size of the fiscal stimulus package was a whopping JPY28 trillion and Bloomberg were reporting that a commentator had suggested that government spending will total JPY7 trillion, in line with earlier reports in the Nikkei that new spending could total in the region of JPY6 trillion, also form a commentator which caused quite a stir in markets recently.  

Analysts at Brown Brothers said, "One reason that Abe may have felt compelled to announce the size of the fiscal plan, which we suggest is flattered by combining programs and the like, is to create a set of optics that would encourage not only immediate support for the stock market (Nikkei rallied 1.7%) but also to encourage the BOJ to be similarly bold. "

BoJ expectations

All in all, the market is poised for more asset purchases and an expansion of equity purchases and debt instruments available for purchase with further cuts to deposit and lending rates, and potentially other liquidity measures. As such, there could be big movements either way today.

USD/JPY levels to monitor

103.36 is the low in Asia and we have seen a recovery back to and through the mid-point of 104.00 within the same 30 min stick.  Should the 103 handle give out on a break of June 30th highs and recent support, 102.20 is next key downside level as the 61.8% retracement. On the upside, 106.50 is a key target that guards 107.50 and 20th July highs. a close above there as an absolute minimum to confirms upside intent. "Overhead lies the 108.78/78.6% retracement, which is the last defence for 111.45 May high," suggested analysts at Commerzbank.