Taisuke Tanaka, Strategist at Deutsche Bank explains that the BoJ voted as expected to keep current policy intact at its Monetary Policy Meeting (MPM) yesterday, one year after its launch of yield curve control (YCC).
Key Quotes
“On quantitative easing, the bank refrained from acknowledging after-the-fact its effective tapering over the past year or changing its annual ¥80trn balance sheet expansion target. The decision was passed 8-to-1 in the first meeting since the departure of policy board members Takahide Kiuchi and Takehiro Sato, who voted continuously against present policy. The dissenting vote this time was by Goshi Kataoka, who argued that the present monetary easing was insufficient. The unhealthy nature of an all-dovish policy board looms as a potential problem in the future, but we suspect the markets will welcome the bank's present unwavering stance, which supports a weak yen and equity rally, for the medium term.”
“We consider yesterday's decision neutral for yen markets. However, BoJ policy is an auxiliary engine for the yen. The primary engine is US factors. The Fed demonstrated a hawkish stance at yesterday's meeting buoying the USD/JPY to the mid ¥112 level. The FOMC indicates that it will begin shrinking its balance sheet in October and maintains its outlook for one rate hike in December and three more next year. Fed Chair Janet Yellen suggested that this year's low level of inflation stemmed from one-time factors. The FOMC's view is broadly in line with ours.”
“If rates are hiked in response to the mid-2% growth in the US economy as per the FOMC's expectations, the USD/JPY should climb beyond ¥115. The BoJ has almost no scope for further easing, but the mere continuance of present policy should support the rise in the USD/JPY in the back of America's robust growth and rising interest rates. Still, the pace of US rate hikes has been slow, and the gap between US and Japanese short-term interest rates is still insufficient to drive a USD/JPY rally. However, as the markets gain confidence in the economy in light of the Fed's rate hike stance, the USD/JPY should seek additional upside in line with higher UST yields.”
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