JPY news - page 17
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Will The BoJ Signal QE Exhaustion? Implication On USD/JPY, AUD/USD
With each wave of quantitative easing (QE) unleashed by central banks around the world, the surge in liquidity chasing yield and depressing volatility gets larger and larger. However, in the last few weeks, markets have started to question whether we may be approaching the limits of QE.
We have been talking to these risks for many weeks, the risks that markets swing from pricing QE Infinity to QE Exhaustion.While it is surprising how quickly it has happened, there are real risks that the yield sell-off can continue, depending on what the Bank of Japan (BoJ) announces next week.
We discuss our thoughts on how and why we are about to hit a limit to QE in Japan; that the BoJ will likely need to become more inventive to extend beyond this limit; that the BoJ has been fighting not just low growth and deflation but also a deep rooted risk aversion within balance sheets in Japan; the best way to deal with this is with more NIRP and that financial risk sentiment could deteriorate further on such an outcome.
FX impact:
To be sure, a “QE exhaustion” signal from the BoJ is of course a vastly different proposition to an active tapering in purchases or an outright decline in the size of the BoJ’s balance sheet. The BoJ’s balance sheet is set to remain bloated for an indefinite period. That said, any hints from the BoJ that it has reached the limits of QE in its current form would nevertheless likely lead to significant dislocation in global markets – a significant decline in risk appetite and a sharp decline in USD/JPY in short order.
Historical analogues point to a hefty fall in JGBs - the six largest significant declines in JGBs back to 1993 saw 10yr JGB yields rise by an average 103bp; albeit with a wide variation: +50bp to +170bp. Retail investor outflow likely slows to a trickle if not an outright reversal and net fixed income flows turn back toward more appetising JGB yields.
USD/JPY would likely break below 100 in fairly short order, en route to the 90-95 zone. Such an outcome would clearly continue weighing on commodity currencies, and our preferred valuation process for short term fluctuations suggests theA$ for instance could continue to fall towards 0.72 before we view it as cheap.
USD/JPY forecast for the week of September 19, 2016
The USD/JPY pair went back and forth during the course of the week, essentially settling on a neutral candle. This neutral candle tells us just how uninspired this market is at the moment. We have been consolidating between the 100 level on the bottom, and the 105 level on the top. Ultimately, I think sooner or later we will find enough buyers to turn this market back around, especially considering that the Bank of Japan has put a bit of a “line in the sand” near the 100 handle. With this, I’m simply waiting for the right buying opportunity.
Markets Brace for a Preemptive Strike by the Bank of Japan
Central banks will dominate market headlines this week, as the Bank of Japan (BOJ) and Federal Reserve vote on monetary policy. According to analysts, the BOJ’s release schedule suggests it may look to upstage the Fed, including adopting measures to further steepen the yield curve.
As Bryan Rich of Forbes recently noted, when the Fed and BOJ meetings fall in the same week, the BOJ decision rarely occurs before the conclusion of the Fed meeting. In fact, the last time the BOJ announced its decision before the Fed in the same week was October 2014, when Japanese policymakers expanded their quantitative easing program. This is a strong indication that something is brewing at the BOJ. Market participants are at odds about what that could be.
Economic Calendar reported earlier this month that the BOJ’s nine-member policy board is divided on the direction of monetary policy. The latest speculation is that the Bank will make negative interest rates the centrepiece of its future easing campaigns.
However, negative rates have failed to make a positive impact, and may have scared businesses into hoarding cash rather than spend or invest it. Negative rates have also failed to upend the yearlong rally in the Japanese yen, which is making it difficult for Japanese exports to compete globally.
The BOJ’s venture into negative rates in January was extremely unpopular, prompting the country’s finance industry to lobby against additional deepening of negative rates.
If steepening the yield curve is on the agenda, the BOJ could follow the Federal Reserve’s 2011 “Operation Twist” by purchasing long-term debt and selling short-term debt. According to William Watts of MarketWatch , the BOJ could also change the mixture of maturities it buys or setting a yield target.
The BOJ will conduct a “comprehensive review” of the economy and monetary policy at its upcoming meeting. Policymakers in July doubled the size of their ETF purchase program, but held off on introducing additional measures.
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Goldman Sachs lowering USD/JPY forecasts
Goldman Sachs say they are not optimistic on the Bank of Japan meeting this week and have thus lowered their forecasts for USD/JPY out to 12 months
This week's 'comprehensive assessment' from the BoJ could be one of two things.
On the one hand, it could be a fundamental reassessment of the policy stance, presumably with a view to adding stimulus. Given that the BoJ is missing its inflation forecast by a mile, this is certainly a reasonable expectation.
On the other hand, it could essentially be a PR exercise, selling the benefits of negative rates after the public backlash from the financial sector following the January IOER cut. This would see policy largely unchanged, with a view to building consensus around existing policies and setting the stage, perhaps, for further rate cuts down the road.
We outlines our expectations for the upcoming policy meeting. We are not optimistic. Similar to the ECB, focus at the BoJ has shifted toward making the existing policy stance sustainable, as opposed to adding stimulus to meet the inflation target. A particular risk - not our base case - is that the BoJ could take steps to bear steepen the yield curve, to help the financial sector following the dramatic curve flattening since January. In our view, such a step could further compound market confusion over BoJ objectives and exacerbate the damage done to longer-term inflation expectations year-to-date.
We are lowering our $/JPY forecast to 108, 110 and 115 in 3-, 6- and 12-months (from 115, 120 and 125 previously). Our 3-month target of 108 reflects our view that the BoJ will continue to ease at upcoming meetings, likely via further IOER cuts. The reduction in the 12-month forecast reflects our view that such easing is not enough to reverse the adverse dynamic that has taken hold since January. For that to be the case, more radical steps such as yield caps or price level targeting are needed, which we believe are not on the BoJ's radar screen at the present time.
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USD/JPY Trades Lower Ahead BoJ, FOMC
We’ve had a quiet start to what should be a very busy week in the foreign-exchange market. Japan was closed for holiday and with no major U.S. economic reports released, U.S. equities weaved in and out of positive territory. The greenback traded lower or held steady against all of the major currencies as 10-year yields ended the day unchanged. While investors are biding time ahead of Wednesday’s Federal Reserve announcement, they are also weary of holding dollars given the unlikely chance of a rate hike this week. At this stage, what’s important is not so much what the Fed does with rates (because everyone expects they will do nothing) but rather how committed they are to raising interest rates before the end of the year. There is no question that the central bank will recognize the improvements in the economy and the easing of global risks, but if the Fed stands down in September, the dot plot forecast will have to change to reflect only one rate hike this year. This, along with a decision to hold rates steady, should be initially negative for the dollar but if more than 1 member of the FOMC dissents from steady rates and Janet Yellen repeats what she said at Jackson Hole -- which is that the case for a rate hike has strengthened, the dollar will soar.
In our opinion, the bigger question mark lies with the Bank of Japan, which has a history of making surprised monetary policy moves. Recent economic reports show that Japan’s economy continues to struggle and despite the Japanese government’s persistent stimulus programs, there’s been very little positive momentum. News reports noted that the BoJ may consider delving deeper into negative rates and if they are right, this unexpected easing will send the yen sharply lower. But if the central bank’s hands remained tied for another month, the yen will rise in disappointment. We believe the chance of the BoJ changing policy materially is slim and at the end of the announcement, investors will end up disappointed once again.
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Sep BoJ: BoJ To Try, Try Again; USD/JPY Bears To Win One Last Time
At its September policy meeting, we expect the BoJ to step up its support for pushing inflation up to 2%. A combination of policy innovations designed to sharpen monetary accommodation and bolster BoJ credibility is most likely, in our view.
But the BoJ will need to guard against the significant risk that markets misunderstand its intentions. Analysts expect a wide range of potential outcomes from the BoJ’s “comprehensive review” to be concluded at its September policy meeting, including the possibility the BoJ effectively admits defeat and scales back its aggressive QQE program. While we are admittedly uncertain about what the BoJ is specifically likely to do this week, we believe it will continue to provide as much or more monetary support. There is a risk, however, the markets misinterpret some of the changes as a stealth tightening, and the BoJ may struggle to convince markets of its resolve.
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Japanese Trade Surplus Turns Negative in August
Japan’s trade surplus turned into a deficit in August, offering further evidence of diminished prospects in a volatile global market.
The Ministry of Finance reported a merchandise trade deficit of ¥18.7 billion in August, following a surplus of ¥513.5 billion the month before.
The country’s exports plunged 9.6% in the 12 months through August. A median estimate of economists called for a 4.8% decline. Exports had fallen 14% annually in July.
Imports depreciated at an even faster rate, falling at an annualized %17.3. A median estimate called for a 17.8%% drop. Imports had fallen 24.7% the previous month.
The only thing keeping down the yen is Fed hopes and fears
The Bank of Japan decision was built up for three months and in the end, all they did was make it a bit easier for banks to make money.
Supposedly, Kuroda "strengthened monetary policy" by disavowing (but also curiously Keeping) the 80T yen annual QE target. In theory, there is now no limit but in practice, he told reporters in the press conference buying could "increase or decrease."
The highlight was YCC, or Yield Curve Control, which is the rumored policy of trying to control the bond market (which should be easy enough, given they own half of it). But given that they're trying to push up the long end, it's far-from-guaranteed it will hurt the yen.
On inflation they promised an "inflation-overshooting commitment", which means expanding the monetary base until the CPI exceeds 2%. The problem with that, like so many BOJ efforts at forward guidance, is that the credibility-tank is empty.
So there was nothing special, nothing unexpected, no negative rates and the BOJ didn't uncover any new stash of ammunition to fear. They warned about cutting further negative or pulling the curve further down but it's hardly something to spook the yen bulls. Kuroda highlighted that foreign bond buying is illegal as well.
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Goldman Sachs: USD/JPY is going to 108
Goldman Sachs on the Bank of Japan decision and what it means for the yen
Ahead of the July meeting, markets were expecting the BoJ to take aggressive action to reverse the rebound in the Yen since January. But in the event, the BoJ only raised the size of ETF purchases from JPY 3.3 tn to JPY 6.0 tn per annum, something seen as incremental by markets when compared to JGB purchases of JPY 80 tn annually. Perhaps in an effort to head off adverse market fallout, Governor Kuroda announced a "comprehensive review" for today's meeting, with the aim of reviewing the effects of QQE since its introduction. In the event, the "comprehensive review" brought fundamental changes.
The BoJ is moving away from quantity targets and switching to yield curve targeting, specifically committing to keeping the 10-year JGB yield around current levels (our rates team's forecast for year-end 2016 is 5bp, and we are not changing this). We see this shift as an elegant way to end the market debate over JGB scarcity, which we have on various occasions argued never made much sense to begin with.
In a separate change, the BoJ is committing itself to achieve an inflation overshoot, i.e. pursuing a policy of negative real rates through bond purchases until inflation is above the two percent target. While the switch to yield curve targeting is arguably neutral, given that it aims to keep the 10-year yield around current levels, the commitment to aim for an inflation overshoot is a meaningful dovish change. Much as in Oct. 2014 when QQE was upsized, price action has been lagging. But we expect $/JPY to move higher on these steps and move to 108 by year-end, our 3-month forecast for this cross.
Goldman Sachs after the Fed and BOJ
The FOMC kept the funds rate unchanged, while signalling a near-term hike. Our US economists think the statement signals a clear bias to tighten in the relatively near future. The statement indicated that "the case for an increase in the federal funds rate has strengthened", and noted that risks to the outlook were now "roughly balanced". The decision also appears to have been a close call, with three committee members dissenting, the first time in five years that three voters have dissented in the same direction. The Summary of Economic Projections was a bit more dovish, showing one hike this year and two hikes next year, down from two and three, respectively.
The bigger surprise was the BoJ's decision to shift from quantity targets to price targets. The Yen, rates and equity indices all rallied in response. We expect the rally in the Yen to reverse, as this policy shift should help address market concerns about the scarcity of JGBs, thus increasing the sustainability and credibility of continued monetary accommodation. The "inflation overshoot" language is also a fundamentally dovish shift, essentially setting up QQE ad infinitum.
Our Rates team have left their end-2016 bond yield forecasts unchanged at 2% for 10-year Treasuries, 5bp for JGBs, 30bp for German Bunds and 1.25% for UK Gilts while our FX team sees considerable upside for USD/JPY in the coming days.
The BoJ is committing itself to achieve an inflation overshoot, i.e. pursuing a policy of negative real rates through bond purchases until inflation is above the two percent target. While the switch to yield curve targeting is arguably neutral, given that it aims to keep the 10-year yield around current levels, the commitment to aim for an inflation overshoot is a meaningful dovish change. Much as in Oct. 2014 when QQE was upsized, price action has been lagging. But we expect USD/JPY to move higher on these steps and move to 108 by year-end, our 3-month forecast for this cross.