BoJ Review: Expect Kuroda To Leave His Mark

We expect the new Bank of Japan (BoJ) governor, Haruhiko Kuroda, to leave his mark when BoJ on Thursday announces its decision from this week's monetary meeting. Kuroda is expected to signal a strong commitment to the new 2% inflation target and to link BoJ's asset purchase programme to reaching this target.

Specifically, we expect BoJ's asset purchase programme to be made 'open ended' already from this year (and not 2014 as currently planned), which implies that asset purchases will not be slowed substantially in 2014. In addition, the maturity of BoJ's government bond purchases is expected to be increased beyond three years.

However, it is not a done deal. Although the doves now have a clear majority on the BoJ board, there is no consensus on how monetary policy should be eased and it could be challenging for Kuroda to create sufficient support for his relatively aggressive easing strategy. It is possible that BoJ will continue to ease within its existing framework and that it will just announce an increase in the target for its end-2013 asset purchases. This would probably be regarded as a defeat for Kuroda and would strengthen JPY.

Expectations for additional easing are already high, so we do not expect to see a substantial market reaction tomorrow and with the current positioning in the market JPY could strengthen substantially should BoJ fails to deliver. However, BoJ remains extremely focused on the exchange rate and the recent JPY appreciation has - if anything - increased the likelihood that BoJ will deliver.

In the short term we expect JPY to be in a consolidation phase. However, with BoJ expected not to slow its asset purchases substantially next year and Fed expected to start scaling down its asset purchases from Q4 13, the longer-term case for a weaker JPY remains.

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