Goldman Sachs on possible early policy adjustment from the BoJ

Analysts Goldman Sachs are out with a dense note on four critical factors driving the market's perceived bets on early policy adjustment from the Bank of Japan (BoJ).

Key quotes (via Goldman Sachs)

• The political window 

2019 will feature a number of key political events, particularly in the second half of the year, including Upper House elections in July and a consumption tax hike in October. It seems likely that the Abe administration would want to avoid any risk of destabilizing the market environment if it were to implement policy changes on either side of these key events.

• 2. Marked shift in the BOJ's narrative on the policy effects

Even Governor Kuroda started to mention that Japan is no longer in a situation where a largescale easing policy is judged as the most appropriate. 

• 3. We think that the greatest concern for the BOJ, no matter what type of policy change it may make, is the market reaction, especially in the forex market.

A hawkish policy change would bring with it the risk of yen appreciation, so if the BOJ were to make a change it would likely do so when it has some buffer, as it does now with the USD/JPY rate above ¥110/US$ (currently at ¥112-¥113). 

• 4. Possible coupling with US policy rate hikes

This point is related to point 3 above. The thinking here is that the BOJ might see an opportunity to avoid sharp yen appreciation even if it were to take hawkish policy action, if it timed such a move to coincide with possible further rate hikes in the US in December of this year and/or March next year.