Interest rate differentials to support modest appreciation in USD/JPY towards 115 - Rabobank

"The July 31 Bank of Japan policy meeting had a polarising impact on the market. Market hawks judged that the Bank may relax its commitment to its current stimulus programme in tune with the paths of normalisation that have been laid out by some other G10 central banks," Rabobank analysts note.

Key quotes

"At its meeting the BoJ decided to step up the strength of its dovish forward guidance. However, its announcement that it would allow a larger fluctuation range for 10 yr bond yields has been taken by some as an early step towards further relinquishment of control over the next couple of years."

"To calm the volatility in the JGB market, the BoJ bought Y400 bln of paper in an unscheduled intervention on August 2 and continued buying at the regular operation on August 3. Although this appeared to calm conditions, the bond market could remain jittery until it becomes clear exactly where the new goal posts lie."

"In reflection of our dovish outlook for the BoJ, we see interest rate differentials as supporting some modest appreciation in the value of USD/JPY towards 115 on a 12-month view. That said, this assumes that the USD rather than the JPY will remain the prime recipient of safe haven flows triggered by fears of trade wars."