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BOJ To Succumb To Political Pressure And Raise Inflation Target

ByDanske Markets
Published 01/21/2013, 12:18 AM
Updated 05/14/2017, 06:45 AM

This week's Bank of Japan (BoJ) meeting is arguably one of the most important ever. There is some defeatism in BoJ's deflation fighting under governor Masaaki Shirakawa's leadership,and BoJ is expected to succumb to political pressure and initiate a more aggressive attempt at kick-starting the economy and defeating inflation. However, in question will also be the independence of BoJ.

We expect BoJ to announce aggressive monetary easing when this week's monetary meeting closes tomorrow. We expect the inflation target to be raised from 1% to 2% and the ceiling for purchases of financial assets to be raised by JPY10trn to JPY86trn. However, there are increasing signs that the asset purchase programme could be 'open-ended' until the inflation target is reached. It is also possible that the interest rate on banks' excess reserves will be cut from 0.1% to zero and the maturity of BoJ's government bond purchases will be increased.

The expected aggressive easing move by BoJ to a large degree reflects that any major correction and renewed appreciation pressure of JPY at the current juncture is extremely unwelcome and is likely to be met with more aggressive easing. As long as this policy remains in place we expect JPY to continue to depreciate. Hence, we expect the depreciation pressure to remain relatively intense over the next two to three months, but as the economy recovers the pressure for a weaker JPY is also expected to ease. Market positioning for a weaker JPY is also stretched, so the market reaction could be substantial if BoJ fails to deliver.

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