BoJ to maintain policy for six months or longer  - Deutsche Bank

Today the Bank of Japan left interest rates unchanged and delayed its 2% price stability. According to economists from Deutsche Bank, the central bank will keep its policy unchanged over the coming months. They see USD/JPY heading lower next year. 

Key Quotes: 

“While compelled to maintain a hopeful outlook in line with its price stability goal, the BoJ had no choice but to recognize officially that inflation remained far from the 2% mark. Our economists argue that yield curve control, the new policy tool introduced in September, is effectively a tapering and that the monetary base has been removed as an operating variable. They feel also that the BoJ will maintain its present policy for a period of six months or longer unless economic cycle comes under significant downward pressure.”

“If BoJ policy can inspire risk-on sentiment at a time when the US economy remains solid, it could boost the USD/JPY. However, as we saw this year, a slowdown in US growth tends to send the USD/JPY downward even if the BoJ eases further. When the US economic cycle is coming in its final stages and the markets see very limited room for further BoJ easing, a rise in the USD/JPY is unlikely to prove sustainable.”

“We believe Japanese stocks will remain relatively firm even if the yen should strengthen.  We stand by our core scenario of a decline in the USD/JPY to the ¥90 level through next year based on a slower momentum in the US economy and supply/demand factors in the yen market. Still, we are not particularly pessimistic over the US outlook, and a vicious cycle of a high yen and equity slump should be prevented with the help of Japanese monetary and fiscal policy. A ¥90 rate would be painful for the economy in the short term, but we consider it a fair level for the long term.”