We expect the Bank of Japan (BoJ) to maintain its 'QQE with yield curve control' policy unchanged at the next monetary policy meeting ending on Tuesday 23 January.
We expect governor Kuroda to downplay the significance of daily market operations and repeat BoJ's commitment to the current yield curve control.
We expect the BoJ to keep its policy unchanged in 2018, assuming Kuroda is reappointed when his term ends in April.
We expect BoJ QE exit concerns and uncertainty about the future BoJ leadership to weigh on USD/JPY and we have lowered our 1M target to 112 (113). Over the medium term, we still see USD/JPY trading mostly sideways within the 110-114.50 range, targeting 113 in 3M.
Jumpy markets increasingly aware of tightening signals
Bank of Japan (BoJ) tweaked the QQE purchases slightly at the beginning of January, now buying JPY10bn less Japanese government bonds (JGBs) in the 10-25 year and the 25-40 year segment. This is still within the preannounced interval and a minor detail, we would say. Even so, markets had a pretty strong reaction on the announcement on 9 January, sending USD/JPY down about 0.5 percent and long rates higher.
Our view is that the BoJ's cutback of purchases is merely a reaction to the recent flattening of the super-long JGB yield curve, as the BoJ is very focused on the shape of the yield curve. The BoJ has de facto tapered since the introduction of its current yield curve control on 21 September 2016 and in the absence of a significant upward pressure on JGB yields, the BoJ is likely to continue buying less JGBs going forward. Currently, the outstanding amount of JGBs is growing at about JPY30trn per year, much less than the BoJ's officially communicated level of JPY80trn. This only serves to make BoJ's policy framework more credible, as it can now last for longer without hampering JGB market liquidity. In case of an upward pressure on rates, we still expect the BoJ to announce a fixed price JGB purchase operation, saying it will buy an unlimited amount of 5-10yr JGBs at 0.11%. In 2017, the BoJ announced such operations twice: on 3 February and 7 July.
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