Japan: BoJ’s more aggressive policy easing expectations pared - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the yen has strengthened sharply in the Asian trading session resulting in USD/JPY falling back below the 105.00-level and further below the intra-day peak from late last week set at close to 107.50.

Key Quotes

“The yen has benefitted from the paring back of more aggressive expectations for policy stimulus in Japan ahead of this week’s BoJ policy meeting on Friday. Comments overnight from Finance Minister Aso appear to have supported yen strength. He stated that the government has yet to decide on the size of the economic stimulus package and that the government will leave actual monetary policy measures in the BoJ’s hands.

The comments have helped to dampen expectations that the government and BoJ would announce some form of co-ordinated policy response on Friday in an attempt to reboot investor confidence in Abenomics. In recent weeks market expectations have been built up high that Japan will provide more powerful policy action even including helicopter money. We continue to remain cautious warning over the risk of disappointment.   

Our analysts in Tokyo do not even expect the BoJ to ease monetary policy this week although it is a minority view. According to Bloomberg’s latest survey, half of the economists surveyed expect the BoJ to lower rates further into negative territory, and just less than half expect the BoJ to announce an expansion of asset purchases. We continue to believe that even if the BoJ eases monetary policy as expected above by just doing more of the same that it would likely prove unsuccessful at re-weakening the yen on a sustainable basis.

Investor confidence in the ability of current monetary easing measures to lift inflation and economic growth in Japan is already diminishing which should help limit the negative impact on the yen. It supports our view that the yen should remain at stronger levels unless the BoJ adopts more radical easing measures which is unlikely at the current juncture.

The focus for fresh policy stimulus could fall more heavily on the government. The   Nikkei has reported overnight that the Japanese government is likely to inject JPY6 trillion in direct fiscal outlays into the economy over the next few years which is double the amount initially planned. The report states that the amount doubled on requests for bigger spending by government officials and ruling party lawmakers.

The draft plan shows spending will focus heavily on infrastructure. For the funding part of the package, the government will reportedly compile a supplementary budget for the current fiscal year of around JPY2 trillion, and the rest will be funded in the budget for the next fiscal year. Meetings on the supplementary budget are expected on Friday with the cabinet making the final decision on the size on the 2nd August. Overall, we do not expect the fiscal stimulus package to have material impact on the yen.”