BOJ preview: Expected JPY reaction - Nomura

Yujiro Goto, FX Strategist at Nomura, analyses the expected JPY reaction to a possible BOJ rate cut and steepening on the bond yields curve.

Key Quotes

We have conducted a client survey on expectations for the BOJ’s meeting this week, and it shows smaller expectations for immediate BOJ action than in July (we thank those who participated in the survey). Ahead of the July meeting, 63% of our clients expected the BOJ to announce further easing immediately. 59% expected additional ETF purchases then, while 30% of clients also expected a rate cut at the July meeting.

Based on our latest survey, only 6% of clients expect the BOJ to expand its ETF purchase programme. 23% of clients still expect an imminent rate cut, but the share has declined from 30%. The consensus survey among BOJ watchers also showed, market expectations for immediate policy action are likely lower than in July.

Instead of an immediate further expansion of the current policy framework, 30% of clients expect the BOJ to announce measures to steepen the yield curve. From recent BOJ leadership communications and media articles, it is unsurprising for investors to expect a tweak in the JGB purchase programme to steepen JGB yield curve.

A clear step towards tapering will be a surprise to the market, but just a tweak of the JGB purchase programme may not cause a big surprise in the market, as clients view the measures to steepen the curve as the most likely policy option for the BOJ.

Clients’ views on the impact of a rate cut on USD/JPY are divided. 40% view the cut as USD/JPY positive, while 34% judge the decision as USD/JPY negative. If the BOJ cuts its policy rate, a USD/JPY knee-jerk reaction is likely to be positive, but a sustained rise in USD/JPY is uncertain. 51% of clients expect a successful steepening of the JGB curve to be neutral for USD/JPY, while more clients (36%) view the steepening to be USD/JPY positive, rather than negative (13%).

This is in line with our view that higher super long-term JPY yields may not necessarily be USD/JPY negative.