BoJ: Scope for USD/JPY to break further higher on unchanged YCC and policy stance – MUFG

USD/JPY could still go higher on the assumption that the BoJ holds off from another YCC change, economists at MUFG Bank report.

BoJ buying of JGBs similar to after the July YCC change could limit the FX reaction

On the assumption of the BoJ not altering YCC or its policy stance in any way followed by an FOMC meeting that unfolds as the market expects, there is certainly scope for USD/JPY to break further higher. 

Expectations have now built up to a degree on a change in policy from the BoJ and hence a no-change announcement could fuel renewed Yen selling. If this scenario were to prompt some big intra-day moves it could be enough to see the MoF instruct the BoJ to intervene. 

The risk scenario of a change in YCC (to +/-150 bps band) would see some Yen appreciation (1%-2%) although like in July if followed by heavy JGB buying by the BoJ the FX impact would likely be muted, especially ahead of the FOMC and the payrolls report. 

The biggest downside risk for USD/JPY would be a removal of NIRP – this would be a very significant and bold step by the BoJ at this juncture and would see a sharper drop in USD/JPY (3%-5%) but we attach a low likelihood to the BoJ lifting its key policy rate from the current -0.10%.