Japan: Monetary policy speculation weakens the yen - MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that an article in the Nikkei suggesting the BoJ will focus future policy easing with deeper negative rates rather than increased asset purchases has helped fuel renewed yen selling.

Key Quotes

“The Comprehensive Assessment will conclude that the net benefits of negative rates outweigh the costs and the Governor and deputy governors are unanimous and are therefore likely to gain a majority in support for additional rate cuts. The recent steepening of the JGB curve was also given credence with the article also suggesting a debate on altering the composition of JGB buying to less long-end buying that could reinforce the recent upward momentum in long-term yields (another investor concern).

The article makes sense to us and we believe the only avenue that remains plausible for further easing is through more negative rates. The limits to asset buying are obvious and the BoJ had to ensure its conclusion to the Comprehensive Assessment indicated monetary easing options remained. Cutting the rate on reserves was always the only viable option remaining.

Finally and importantly perhaps, the article also states that the process of the Comprehensive Assessment will be drawn out and hence we should not assume a rate cut will be forthcoming this month. It may well be that the BoJ will wait until the updated real GDP and inflation forecasts are released at the meeting on 31st Oct/1st Nov. The yen has weakened on the back of this article but no action next week would obviously see the yen strengthen once again.”