JPY corrects stronger, BoJ key for 2017 - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that the BoJ policy announcement yesterday held no surprises for the markets although the yen selling that followed the uneventful policy announcement did suggest that market expectations were skewed toward a surprise shift in the BoJ’s 10-year JGB yield.

Key Quotes

“That did not happen and indeed Governor Kuroda was eager to stress that now was too soon to consider an upward shift to the zero percent 10-year JGB yield target. The yen also sold off on Kuroda playing down the extent of yen weakness since Trump’s election and argued that the yen was not excessively weak.”

“However, the lack of follow-through in yen selling is telling and indicates to us that the yen is trading at much weaker levels than Governor Kuroda suggested yesterday. It also indicates that while the BoJ did not alter its policy stance yesterday, the probability as we go into 2017 is still skewed toward the BoJ lifting the zero percent target at some stage. The yen has weakened on strong Trump reflation expectations but if those expectations are met then market forces are likely to leave the BoJ with little option but to raise the zero percent target. Governor Kuroda was keen not to go into the details of an acceptable tolerance range around zero percent but if US yields continue to rise, upward pressure on JGB yields will follow. Increased expectations of a shift in the zero percent target policy will then act to limit the scale of yen depreciation from here.”

“Governor Kuroda also played down the USD/JPY move as being really just a dollar move with all currencies weakening against the dollar. That’s of course true although there is a yen angle to FX moves as well given the yen has weakened by close to 11.5% since Trump’s victory in contrast to the 5%/6% moves for the next worst G10 performers. Given BoJ policy sustainability questions may resurface as we go into 2017, we are not convinced the under-performance of the yen since Trump’s victory is justified. Don’t forget, the shift to Yield Curve Control was a strategy to get away from a forced level of asset purchases – an effective way to taper purchases while maintaining stable yields. Under a global reflation dynamic that strategy will quickly start to look tenuous.”