We expect the Bank of Japan (BoJ) to cut its policy rate by 20bp to -0.3% and expect additional qualitative measures, including an upscaling of ETF and J-REIT purchases. We believe our forecast of BoJ easing will be a moderate positive surprise to the market compared with current pricing.
We expect the Japanese Government to announce a substantial fiscal stimulus package with a direct economic effect of JPY6trn (1.2% of GDP). We do not expect the BoJ to adopt helicopter money measures in the sense of a permanent increase in the monetary base or in the form of direct BoJ underwriting.
We expect USD/JPY to bounce 2-3 figures on the policy announcement but we do not look for a sustained rally in USD/JPY. On a 3-12M horizon, we expect USD/JPY to stabilise as further negative interest rates and continued portfolio outflows out of Japan would help to underpin USD/JPY and thereby counter the underlying support for JPY stemming from fundamentals. We target USD/JPY at 107 in 3M and 108 in 6-12M.
We expect Japanese yields to inch lower across the JGB curve and expect the curve (2Y10Y, 5Y30Y) to bull-steepen following the announcement. Lower Japanese yields are likely to have implications for both Treasury and Bund yields.
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