We expect the Bank of Japan (BoJ) to keep its monetary policy unchanged on 29 January. In our main scenario, we still expect BoJ to continue its current QQE programme, with an annual target of JPY80trn until the end of 2017.
But, pressure on the BoJ to ease is rising and the probability of additional easing has increased substantially due to a stronger yen, lower oil price and falling inflation expectations.
Notably, the 'shunto' wage negotiations will be pivotal for BoJ's policy, but the central bank will also stay alert to further yen appreciation, we believe that USD/JPY at 115 is the threshold for the BoJ.
We expect USD/JPY to be caught in a 118-123 range in the coming 12 months, but see risks skewed significantly to the upside in the event of additional BoJ easing.
We think that USD/JPY below 117.50 offers an attractive risk reward considering the very asymmetrical outcome of the BoJ's policy.
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