BoJ will unlikely become key focus for USD/JPY – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, points out that BoJ policy board members Takehiro Sato and Takahide Kiuchi will reach the end of their five-year terms on 23 July and their retirement is likely to become the key focus for the USD/JPY trajectory over the near-term.

Key Quotes

“Their retirement is regrettable given their ability to analyze events independent of BoJ leaders and argue in their own words against the bank's ultra-accommodative easing policy. As their successors, the government yesterday proposed Goushi Kataoka, an economist at Mitsubishi UFJ Research and Consulting, and Hitoshi Suzuki, a director at Bank of TokyoMitsubishi UFJ.”

“This would leave the policy board with eight reflation advocates among the nine members, including four quantitative easing (QE) supporters (Kikuo Iwata, Yutaka Harada, Makoto Sakurai, Kataoka) and four extreme easing supporters (Haruhiko Kuroda, Hiroshi Nakaso, Yukitoshi Funo, Takako Masai). Suzuki does not necessarily have the same standing as the other eight given his bank's noted criticism of the negative interest rate policy, but it is hoped that he will serve as a link to the megabanks at a time when the BoJ policy is reaching its physical limits.”

“The personnel changes have no particular implications for the yen markets. Seven of the nine policy board members are already reflationists, so the replacement of two members will not affect the vote count for policy matters. The BoJ, aware that its ¥80trn annual expansion of the monetary base is becoming untenable, shifted its pivot from QE to yield curve control last September and is likely to continue along this path for now.”

“The bank will continue to have the most aggressive easing stance among the G3 central banks. The US economy, the primary engine driving the USD/JPY market, remains robust. If the Fed proceeds with its tightening, BoJ policy should contribute to a higher USD/JPY as a secondary engine. However, if the primary engine should falter, the secondary engine will not be able on its own to boost the USD/JPY (though it may help prevent an excessive downturn).”

“BoJ policy should remain supportive of the USD/JPY, but the focus is still the US economy and interest rates. How to buoy the US economy, which seems to have peaked last year, will depend on the Trump administration. We believe the US will enact tax cuts, if only partially, and achieve faster economic growth, leading to two additional tax hikes this year. We maintain our main scenario that the USD/ JPY will recover to ¥110-115 or higher in that process.”