EUR/JPY: Bank of Japan to play key role, 6M target at 140

According to analysts from Danske Bank, Bank of Japan’s quiet tapering and personnel changes add uncertainty. They see EUR/JPY at 146 in 12 months.

Key Quotes:

“Growth momentum in Japan has been strong recently and the economy has now expanded for seven consecutive quarters – the longest economic upturn since the beginning of the 2000s. Growth is being driven primarily by the global economic recovery, which on the back of the relatively weak yen is pushing exports to their strongest streak since the big rebound in the global economy in 2010. We expect to see growth closer to trend as fiscal stimulus wanes. We forecast 1.7% in 2018 and 1.0% in 2019.”

“Our main scenario expects the BoJ to keep its policy unchanged, maintaining the short-term policy interest rate at -0.1% and the 10Y Japanese government bond (JGB) yield at 0% over our 12M forecast horizon, assuming BoJ governor Haruhiko Kuroda is reappointed when his term ends in April.”

“Focus in the coming weeks is likely to be on BoJ’s personnel changes as Kuroda’s term ends on 8 April and Deputy Governor Iwata and Nakaso terms end on 19 March. The cabinet with the consent of the Diet appoints the BoJ governor and deputy governors. All three personnel changes are likely to be discussed at the same time (as was the case five years ago when
the three were appointed at the same time). It is widely expected that the decision will be made before the end of February. If Kuroda is reappointed (in line with Danske Bank and consensus), the reaction in JPY should be Limited”

“The direction for the JPY will largely be determined by the policies pursued by the Bank of Japan (BoJ). If Kuroda is reappointed, we expect the BoJ to keep its policy unchanged, which would lead to a weaker JPY. We target EUR/JPY at 134 in 1M, 136 in 3M, 140 in 6M and 146 in 12M.”

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