Japan: Will the BoJ ease policy further in September? – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the major foreign exchange rates continue to remain stable ahead of Fed Chair Yellen’s speech at Jackson Hole on Friday.

Key Quotes

“USD/JPY has traded within a very tight trading range so far this month between 99.54 and 102.83 as key psychological support at the 100.00-level continues to hold. The trend still remains lower for the pair but downward momentum has stalled in the near-term. The market is waiting for a fresh trigger from Fed Chair Yellen although it is not guaranteed that she will definitely provide a clearer signal over the outlook for monetary policy which has become more uncertain recently.

If there is no clear policy signal over the likely timing of the next rate hike, the market will at least initially take it as a relief that a hike is not imminent weighing modestly on the US dollar. The Fed will be aware that the market is attaching roughly less than a “one in three” chance of hike in September and would likely want to guide the market to price in a closer to “50:50” probability of policy action if they are seriously considering raising rates.           

In contrast, the BoJ is seen as more likely to change monetary policy than the Fed in September. A Reuters’ poll released overnight revealed that about 60% (14 out of 24) of Japanese economists expect the BoJ to ease monetary policy at their next meeting on the 21st September. The BoJ will have completed their comprehensive review of current monetary policy settings potentially providing a trigger for further easing if judged to be required to support the return of inflation to their target. Amongst the economists that expect the BoJ to ease monetary policy further next month, there is no clear consensus view on what policy measures they expect.

Two economists expect a further deepening of negative rates, two expect an expansion of commercial paper and corporate bond buying, and four expect a combination of deepening negative rates and additional asset purchases. Another six economists expect the BoJ to overhaul its current policy framework. In a separate question, 15 out of 28 economists responded that they expect the BoJ to also adopt more flexible terms on the timing for reaching the inflation target.             

Our analysts in Tokyo continue to remain in the minority expecting the BoJ to refrain from further monetary easing in September and attach a higher probability to further easing in the following month.  We remain sceptical that further BoJ easing will prove effective at reversing the yen strengthening trend unless more radical policy measures are adopted which is unlikely in the near-term. However, if the BoJ was to ease policy in September alongside the Fed delivering a rate hike it could help to keep USD/JPY above the 100.00-level for a little longer.”