JPY: The beginning of the end of QE - Rabobank

Jane Foley, Research Analyst at Westpac, notes that last week BoJ Governor Kuroda acknowledged some of the downsides of negative interest rates and asset purchases programmes.

Key Quotes

“He commented that they can hit the profits of financial institutions while low long-term yields can hurt other business by forcing them to put aside more money for long term pension obligations. For some time dissenting BoJ committee member Kiuchi has been arguing that the marginal effects of the BoJ’s QQE policy have been diminishing and that the benefits “had already been outweighed by the side effects”. A newswire report yesterday that the BoJ was studying ways to steepen the yield curve – which could imply tapering the purchased of long dated bonds – further heightened the market’s sensitivities regarding the future of ultra-accommodative policies.

Recent Japanese data has been mixed but with inflation still very weak it would seem more likely that the BoJ would be persuaded to increase rather than taper asset purchases. Even so, we have been arguing that unless US yields push higher a soggy USD will continue to prevent the BoJ from being able to increase the value of the USD/JPY significantly.

We see the risks to USD/JPY, however, as asymmetric and the currency pair could drop heavily if the BoJ was seen to be pulling away from policy accommodation at this juncture. Although the market is hoping that the BoJ can pull something out of its sleeve, there is significant risk that the market will be disappointed. Not only is it likely that USD/JPY will trade heavily into the end of the year, but without a show of innovation from the BoJ next week scepticism over the outlook for bond buying programmes could also extend.”