BoJ facing a high hurdle to re-weaken the yen – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the yen has continued to strengthen modestly in the Asian trading session dragging USD/JPY back closer to key support at the 100.00-level.

Key Quotes

“With the Fed widely expected to leave their key policy rate unchanged at tomorrow’s FOMC meeting, the BoJ is facing a high hurdle to re-weaken the yen in the near-term. Even if the BoJ announces further monetary easing at tomorrow’s policy meeting, we believe that it would only weaken the yen temporarily. A continuation of the recent stability for USD/JPY which has traded mainly between the 100.00 and 105.00-levels since the middle of the year may prove the best that Japanese policy makers can hope for.

We still see risks as skewed to the downside for USD/JPY ahead of the upcoming US Presidential election. USD/JPY could come under renewed downward pressure in the coming month potentially breaking below the 100-level if financial markets begin to become more nervous over the prospect of Donald Trump becoming President although so far there has been little impact on the pair.  

For the BoJ to have a more material and lasting negative impact on the yen, it will have to announce fresh easing measures which shock the market and prove more effective at lifting inflation expectations. Reports have speculated that the BoJ is considering implementing measures to steepen the yield curve through a combination of lowering rates further into negative territory and tweaking their asset purchase programme.

Such speculation was supported further overnight by comments from former BoJ board member Sayuri Shirai who stated that the “chances are high that the BoJ chooses a rate cut over more bond buyers”. She believes that the BoJ can lower interest rates below the ECB’s current deposit rate which is set at -0.4%. However, she is not confident that the BoJ will be able to meet their inflation target and sees it as inevitable that it will have to delay the timing of hitting their goal. She would prefer it if the BoJ first set a lower target for inflation of 1.0%.

We doubt that just tweaking current policy steps in an attempt to steepen the yield will prove effective at re-weakening the yen on a sustainable basis. The yen could even strengthen if the BoJ refrains from easing tomorrow as our analysts in Tokyo are expecting, although they still see further easing as likely in the coming months.”