JPY: Q1 2018 will be important - Westpac

Robert Rennie, Research Analyst at Westpac, suggests that Q1 2018 will be important for the ¥ as Kuroda’s term is due to expire April 8 and in theory, the Jan 23 will be his last quarterly “Outlook” meeting, though Westpac fully expect Kuroda to be reappointed to a second term.

Key Quotes

“The economy will face headwinds in 2019 as the consumption tax hike hits and the Olympic Games-related boost likely slows. Thus a steady hand in early 2018 looks to be the best option. The economy finishes 2017 on a high, helped by the solid trend in exports, although the pace is likely set to slow into year end.” 

“A key issue to be considered in Q1 18 will be the current YCC policy. We have long maintained the view that trying to both increase JGB holdings by about ¥80tn and achieve the target level of JGB yields is internally inconsistent. This view has been correct in that over the last 3 months, the BoJ has bought a net just ¥28tn of Japanese government securities on an annualised basis while the balance sheet has increased by ¥38tn. Indeed, at no point in 2017 has the BoJ hit its ¥80tn target. Thus it’s better to use the upcoming Jan 23 meeting to tweak the policy – with a fresh balance sheet target at ¥40tn.”

“This we have long argued could be a positive for USD/JPY – by removing the nagging doubt that a taper is coming and simply marking purchases to market, the BoJ can actually open up some ¥ downside.” 

“Despite the muted reaction to the FOMC hike, we maintain a more upbeat outlook view for the US$ and thus fully expect to see a higher level for USD/JPY as we move through Q1. However, what eventuates Jan 23 will be key for this view.”