The decision making will be “pretty difficult” as their fellow colleagues from FOMC will be deciding on exit strategy couple of hours later the same day. Actually, we believe they already know about the FOMC decision at this point.
But let’s focus on a few facts about BoJ first:
- Expecting a comprehensive assessment of monetary policy, its tools and effects, economic activity – positive words, not really pointing to negative effects
- Confirmingthat negative rates and asset purchases helped to lower the funding costs for corporates, not caring much about banks
- …but all of that is very questionable for banks as their profit margins got squeezed or turned negative (latest call on BoJ officials from one of biggest Japanese banks to take into account negative effects of low or negative rates). Also the pension funds and savings suffer what is not offset by rising consumption of aging nation as Japanese are. From this perspective, the Japanese companies are more worried about pension obligations than effects of borrowing costs on their business.
- Actually the aging and heavily indebted economy is becoming less and less flexible and responsive to any policy actions to ignite the growth and inflation. Japan as a country will have to face very tough structural reforms and need to globalize the corporate sector more in the near future.
- While looking at the asset purchases of stocks, corporate bonds, ETFs…etc., we are not sure whether BoJ, already in some cases a significant shareholder of some companies, is analysing its steps, influencing the board decisions…etc. – what is really insane just as a fact itself that central bank is a shareholder…!!! Aren’t we witnessing currently a global nationalisation…?
- Inflationstill well below 2% target with long term expectations being very weak too (don’t blame oil only)
- Economystill not able to grow at desirable pace but some positive signs are here
- The yield curve has started to steepen recently – a sign of markets expecting something from BoJ (for example more flexibility with bond purchases, reducing of purchase on longer end or tapering…etc.). Bear also in mind that any spike up in JPY may be short lived as higher long term yields are usually negative for JPY.
- Opinion split between BoJ officials, as well as officials and government is becoming more visible (more negative rates vs bond purchases vs none of them).
Our expectations:
- Overall we expect BoJ to be very bold about its decisions but still may disappoint the markets as Kuroda’s team will keep some roomfor a follow up action after FOMC decision. In other words they will come up with a bit more flexibility, few tweaks of QE, eligible assets (local or foreign bonds), maturities...etc. and as a reaction the USDJPY will be falling towards 100, then reaching the recent lows around 99, and if there is no action over coming weeks/months it can even move lower to 95 or so.
- Further rate cut is possible, especially as an attempt to widen the yield spreads with US Treasuries once the JPY starts to strengthen again and also to move more from JGB purchases in order to steepen the yield curve at long end, thus giving the banks a chance to increase margins (deposits vs loans).
On the upside we see for USDJPY the resistance levels at 102.50, 103.50, 105.00 and 107.50. From technical perspective closing on weekly chart above 104.50/105.00 levels opens the sky as a limit for USDJPY.
- Next meeting is on Oct 31-Nov 1 but the action (for example intervention) can take place even before that meeting especially, in case of significant JPY strengthening to USDJPY 100 or below level
- Improving predictability and communication/guidancewould bring lots of clarity to markets. May be they are not sure what to do or are split and that’s why they do not communicate properly (Fed officials come to my mind with this point as well)
- As per CFTC commitments of traders report as of Sep 13, 2016 the speculators were long 57k JPY futures contracts vs 54k previous week what may tell us that the market has either doubts about BoJ actions or is not expecting the move
- In case of a combination of no action from BoJ and Fed we may refocus ourselves on US presidential debates and elections on Nov 8, as the range bound trading will continue once the dust settles.
Good luck Champs!
Mr Hawk
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