Muted reaction to BOJ communication, not bad for USD/JPY – Nomura

Yujiro Goto, Research Analyst at Nomura, notes that the BOJ board member Harada said today that more easing may not be necessary at this time, although he admitted that the achievement of the price target has been delayed.

Key Quotes

“Mr. Harada said the BOJ would implement further easing without hesitation if needed, but the likelihood of near-term easing now seems low. BOJ Governor Kuroda has already suggested the possibility of immediate easing is low, and Mr. Harada’s comment is in line with the governor’s view. The latest JCER survey on the timing of additional easing showed subdued expectations for immediate easing among BOJ watchers. In fact, FX market reactions to Mr. Harada’s comments on the low possibility of easing were fairly muted.

During the Q&A session, Mr. Harada said the BOJ would purchase more JGBs when a positive shock occurs (upside pressure on yields increases), which could add stimulus (Kyodo). On the other hand, when a negative shock occurs (downside pressure on yields increases), the BOJ could keep the pace of JPY80trn JGB purchases, allowing yields to decline. Mr. Harada said the new policy framework implies the possibility of asymmetric policy responses to positive and negative shocks and thus, the framework strengthens the easing. Mr. Harada also said the BOJ could add monetary stimulus in the event of large negative shocks, in his view.

Mr. Harada is viewed as keeping his positive view on the efficacy of quantitative easing, while the BOJ has shifted its policy framework to the yield curve control policy. Thus, it is unclear whether these asymmetric policy responses are shared view by the BOJ board members. The potentially counter-cyclical nature of the new policy framework when negative shocks occur is viewed as a downside risk for USD/JPY, and asymmetric policy responses could be viewed as positive for risk sentiment, while further clarification is necessary.

Mr. Harada also said it is good to create some steepness in the yield curve and the recent rise in 20yr yield is healthy. He said banks’ lending is expected to increase when the Japanese economy moves out of deflation. Although he admitted flattening could reduce the profits of financial institutions, he suggested the BOJ should prioritise the exit from deflation. Nevertheless, he sees the recent rise in super-long-term JGB yields as healthy, which shows wider consensus among BOJ board to avoid further flattening of the curve. We judge lower global yields have been working negatively for USD/JPY, but potential changes in the trend should be USD/JPY positive.

We think it is important for the BOJ to keep the JGB market stable to weaken JPY, and the recent muted reaction to BOJ communication is JPY negative in the medium term. As the JGB market remains stable, we expect foreign bond investment by Japanese investors to stay relatively high, while more FX risk taking is possible. Market expectations for near-term BOJ easing have declined, which also limits the downside risks for USD/JPY.”