28 Apr 2016
BOJ preview: What to expect in USDJPY? - Nomura
Nomura summarizes its view on likely USD/JPY reactions to the BOJ announcement today, noting that there are various potential policy options for the BOJ, although they judge the announcement of a negative rate loan programme is likely, without other easing options.
Key Quotes
1. Negative rate loan support programme = +1.5pt (USD appreciates against JPY). This policy option would alleviate the negative side effect of negative rate policy on banks’ profits and make it easier for the BOJ to cut interest rates in the future. It would also likely benefit Japanese equity markets, especially banking stocks. Market reactions to the Bloomberg article last Friday show that this option is likely to be USD/JPY positive.
2. Additional ETF purchases = +1.5-3.0pt (USD appreciates against JPY). Additional ETF purchases would have a direct positive impact on Japanese equity markets and would likely also be USD/JPY positive (see “JPY: FX hedging flows amid volatile equity movements”, 14 April 2016). In our judgment, JPY2-3trn of additional purchases would lift USD/JPY by about 1.5 points, while JPY10trn in ETF purchases per year would have a larger positive impact on USD/JPY (+3.0 points).
3. IOER cut by 10bp (cut from current -10bp to -20bp) = -0.5pt (USD/JPY depreciation). Our client survey shows that views on an IOER cut were mixed, but many investors believe an IOER cut would be JPY positive (see “JPY: Market views into BOJ meeting”, 25 April 2016). The survey showed many investors saw an IOER cut as “equity negative, USD/JPY neutral and USD/JPY negative in the medium term.” If the BOJ cut IOER this week, we would expect the interest rate on the loan support programme to also be cut by 20bp to match the level of IOER. As a result, the negative impact of IOER cut would be less significant.
4. Further JGB purchases = +0.5pt (USD/JPY appreciation). Further JGB purchases would exert downside pressure on the JGB yield curve, especially on the long end of the curve, which would gradually encourage Japanese investors to shift their money into foreign bonds (see “JPY: The shift into foreign assets by lifers should continue”, 27 April 2016). At the same time, investors can see the limits of further quantitative easing, which likely would limit the impact on USD/JPY.
Key Quotes
1. Negative rate loan support programme = +1.5pt (USD appreciates against JPY). This policy option would alleviate the negative side effect of negative rate policy on banks’ profits and make it easier for the BOJ to cut interest rates in the future. It would also likely benefit Japanese equity markets, especially banking stocks. Market reactions to the Bloomberg article last Friday show that this option is likely to be USD/JPY positive.
2. Additional ETF purchases = +1.5-3.0pt (USD appreciates against JPY). Additional ETF purchases would have a direct positive impact on Japanese equity markets and would likely also be USD/JPY positive (see “JPY: FX hedging flows amid volatile equity movements”, 14 April 2016). In our judgment, JPY2-3trn of additional purchases would lift USD/JPY by about 1.5 points, while JPY10trn in ETF purchases per year would have a larger positive impact on USD/JPY (+3.0 points).
3. IOER cut by 10bp (cut from current -10bp to -20bp) = -0.5pt (USD/JPY depreciation). Our client survey shows that views on an IOER cut were mixed, but many investors believe an IOER cut would be JPY positive (see “JPY: Market views into BOJ meeting”, 25 April 2016). The survey showed many investors saw an IOER cut as “equity negative, USD/JPY neutral and USD/JPY negative in the medium term.” If the BOJ cut IOER this week, we would expect the interest rate on the loan support programme to also be cut by 20bp to match the level of IOER. As a result, the negative impact of IOER cut would be less significant.
4. Further JGB purchases = +0.5pt (USD/JPY appreciation). Further JGB purchases would exert downside pressure on the JGB yield curve, especially on the long end of the curve, which would gradually encourage Japanese investors to shift their money into foreign bonds (see “JPY: The shift into foreign assets by lifers should continue”, 27 April 2016). At the same time, investors can see the limits of further quantitative easing, which likely would limit the impact on USD/JPY.