JPY: US rate moves dominate for now - Nomura

Yujiro Goto, Research Analyst at Nomura, notes that the expectations for near-term BOJ easing have declined further among BOJ watchers, according to the JCER survey (28 December to 10 January).

Key Quotes

“Only 3% of economists expect the Bank to ease by February, while three-month expectations have also fallen. The consensus forecast remains more pessimistic on an inflation recovery than the BOJ, as consensus expects FY17 core inflation to be just 0.77% (BOJ forecast: 1.5%). Nonetheless, positive financial market developments since the US election lowered near-term easing expectations further, while expectations had already declined after the introduction of the yield curve control.” 

“At the same time, expectations for tightening have not increased yet. 90% of respondents expect the policy rate to stay at -0.10% to 0.00% by end-December, expecting no changes in policy rate. The 10yr yield target is also expected to stay at 0.00% to +0.10%. In December expectations for the policy rate and 10yr yield target were more divergent, but expectations have now converged to no changes.” 

“Weak expectations for BOJ tightening are reasonable, as expectations for wage hikes remain subdued. The consensus expectation for base salary increases in FY2017 is just +0.5% y-o-y, largely unchanged from +0.3% for FY2016. Our economists expect wage increases to remain small. Japanese wage formation tends to be more backward-looking and the BOJ needs to be patient this year. The recent USD/JPY depreciation should also keep the BOJ cautious at its next meeting on 30-31 January. We expect Governor Kuroda to maintain his dovish stance.”  

“USD/JPY has been trading weakly while its correlation with the rate differential remains high. As market expectations for BOJ policy changes continue to decline, moves in the rate differential are currently dominated by US factors. The sensitivity of JGB yields to foreign yields remains low under the yield curve control policy. Market expectations for quicker Fed hikes have declined after President-elect Trump’s press conference last week, putting downside pressure on USD/JPY.” 

“In the short term, policy communications from US cabinet members and Fed Chair Yellen this week will be important for USD/JPY, and further near-term downside risks cannot be ruled out. The real rate difference is currently pointing to range trading at 110-115. In the medium term, recent US data still warrant at least two hikes by the Fed, even if fiscal stimulus is delayed. High correlation between USD/JPY and US rates suggest the risks of USD/JPY breaking below 110 remain limited.”