As BBG’s Vincent Cingarella says, nothing short of a Herculean effort is likely to weaken the Yen over the long-term amid speculation about what the BOJ and government stimulus will look like. Over the short-term it is a different story, because as reported earlier, a report in mid afternoon NY time about the government pressuring the “independent” central bank to boost its stimulus sent USD/JPY higher but only back to levels seen early in the session, with the Yen rising gradually since because as we wrote earlier, the BOJ will be hard pressed to surpass latent expectations of outright helicopter money.
Thoughts from various market participants on what may happen tonight:
- USD/JPY little changed at 105.25, 104.49/105.51 range; pair spiked in
late afternoon as algos tripped stops on Reuters report MOF was
preparing statement in the event BOJ eases- Any token stimulus from BOJ would need to target banks to have durable impact on market, such as equity purchases and/or rate reductions in loan support program, TD’s Mazen Issa said
- Headline stimulus figures haven’t necessarily gotten to the real story; actual new money may be far less
- Majority of economists in a Bloomberg survey expect BOJ to cut further into negative rates.
- Downside potential for JPY limited; combination of a small extension of the asset purchase program and small rate cut seems likely, Commerzbank’s Antje Praefcke wrote to clients
- Pimco’s Clarida sees 50% chance that the BOJ disappoints
What Wall Street banks expect will happen:
Citi’s Naoki Lizuka
- BOJ Governor Haruhiko Kuroda can disappoint investors by just extending widely unpopular negative rates.
- BOJ may take step even as PM Shinzo Abe’s unusual 28t yen stimulus seen as putting pressure on BOJ to aid economy
Negative rates
- Base case; stocks may react negatively
- Nikkei’s July-Sept. range 14,750-17,250
- Buy so-called “bond refugees” like Takeda, Daiichi Sankyo, Japan Airline, NTT Docomo and REITs; underweight banks, insurers
Quantitative and qualitative easing
- Expected by 20% of Bloomberg survey respondents
- To be interpreted as so-called helicopter money
- Nikkei will rise past 17,000 with July-Sept. range of 15,750-18,000
- Buy realty, brokers, financial stocks
Fully-fledged easing
- 25% of Bloomberg survey respondents expect this
- Same reaction as to QQE with more uncertainty on forex effect
Small easing or postponement
- 25% of Bloomberg survey respondents expect this
- Would be negative surprise to investors, sending Nikkei down to 15,000-15,500 range
- Wouldn’t expect any marked recovery; July–Sept. range would be 14,000-16,500
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BofA’s Shuici Ohsaki
- The Bank is likely to lower its price forecasts and we look for it to double its ETF purchases to around ¥6tn annually and potentially lift its JGB purchase pace in line with the increased issuance from the fiscal stimulus plan. Inclusion of municipal and agency bonds is also possible, but given their small market and limited liquidity, we see this as more of a symbolic gesture.
- We do not expect a further cut in interest rates at this time, but we would not completely rule it out either. The BoJ would need to find a way to minimize the adverse impact upon banks from a more negative policy rate.
- The BoJ’s potential easing is not an isolated action as we have been expecting a stimulus package of ¥15-20tn in total spending.
Implicit fiscal-monetary coordination
We are not calling for “helicopter money”, which has been a hot media topic. In the financial markets, expectations of fiscal and monetary easing are building, but there seem to be different ideas about the degree of coordination.
1. Implicitly coordinated fiscal-monetary easing: The government unleashes huge economic measures with a supplementary budget. The BoJ expands monetary easing, potentially including through increased purchases of JGBs. The two are “synchronized” with roughly concurrent announcements.
2. Explicit coordination between the government and the BoJ: In addition to the above fiscal-monetary easing, the government and BoJ announce an accord of commitment to fiscal expansion financed (semi-)directly by the BoJ’s JGB purchases until the inflation target is met (from the 13 July Sankei Shimbun’s front page).
3. Debt monetization: The BoJ restructures its existing JGB holdings to zero coupon perpetual JGBs, and/or the government issues perpetual bonds to the BoJ directly. (leaving legal issues aside, where there is a will there is a way).
Options (2) and (3) could be called the soft and hard versions of “helicopter money”, and the likelihood of either being adopted in the near term is low, in our view. This is because (1) Japan’s economy, with its 3.3% unemployment rate, can hardly be defined as in crisis; (2) such drastic policies could shake the JGB market and JGB investors; and (3) there have been no cases of developed economies resorting to dropping “helicopter money” in recent history, and considerable uncertainty surrounds the consequences of such a plan.
At the end, we find it hard to believe anyone in Japan, including the Abe Administration, the MoF, the BoJ, or the public, hopes for hard “helicopter money” at the moment. Even if they did, nobody seems to have the political capital to pull it off and conduct it for a prolonged period of time. As such, “implicitly coordinated fiscal-monetary easing” is the most likely possibility, in our view.
USD/JPY110 unlikely to be broken decisively on coordinated easing
The fiscal-monetary easing we expect at the end of this month is unlikely to allow USD/JPY to break 110 decisively, which is the maximum we originally expected a potential technical rebound could extend to right after the Brexit vote ($/¥ close to the bottom, but global risks to deepen the downside into autumn 26 June 2016).
(1) A comprehensive monetary easing with a potential deep vote-split among the policy board may be perceived as one last shot. (2) Spot market rebounds, a rise in volatility, and moderation in skew suggest doubling ETF purchases in conjunction with fiscal expansion of around a ¥3tn supplementary budget have mostly been priced in. (3) Medium-term uncertainties in the global market after the Brexit vote have not fundamentally dissipated and external economies may not welcome Japan’s deflation export. (4) Fiscal-monetary coordination is about Arrows 1 and 2 of Abenomics while Arrow 3 may be left out so “risk-on” yen weakness may not be supported. On the other hand, external conditions that lead to a bad JPY weakening–high oil prices, solid economic fundamentals for other currencies, and strong global inflation pressures are not present, and (5) exporter USD selling is expected into 110.
Positioning is building, but probably not close to extreme yet from the historical standard, so it is hard to think the market will sell the fact hard if the BoJ delivers easing, but we need stronger catalysts to lift USD/JPY above 110 sustainably.
Risks: BoJ standing pat a bigger risk than real “helicopter money” If the government and BoJ decide to engage in hard “helicopter money”, the longer-term fundamental value of the JPY will likely be called into question and could weaken well past 110 and regain its structural bearish trend. In our view. a more likely risk scenario, however, is that the BoJ could also be saving its easing card until autumn in view of the political calendar (Japan for “whatever it takes”; monetary-fiscal coordination not helicopter money 15 July 2016). The market focuses more on the fiscal expansion, but expectations of fiscal-monetary coordination have grown significantly, and it would come as an outright disappointment if the BoJ holds firm. Further, fiscal expansion alone would usually be considered positive for the currency. If the BoJ decides to stay on hold, we think the USD/JPY is likely to sell off with 105 now becoming a ceiling and our scenario that USD/JPY breaks 100 will become increasingly likely.
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ISI Evecore
- Just wanted to chime in on the Yen reversal lower today, which is likely helping support risk assets this afternoon.
- This came an hour ago, “Japan’s MOF has prepared a draft statement in the event of BOJ action” – Reuters.
- Given some recent concerns over potential BOJ disappointment, the expectations of something bigger from BOJ have increased.
- Krishna expects easing with more ETF, some corp bond purchases, more JGB purchases and a -10bp rate cut.
- That being said, he notes it is a very difficult meeting to call as the BoJ faces real problems with both of its main tools (JGB purchases, negative rates) and its reaction function has been unstable ever since the backlash against negative rates in Jan.
- The Yen move will likely dictate the move in Nikkei and risk assets generally following the decision…
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Goldman
In our view, the government will want to pursue a policy mix of fiscal and monetary measures so that each of these policies, which might not appear significant in isolation, supplement one another. We think radical policy proposals, such as the so-called helicopter money from advisors close to the Prime Minister and others suggest a strategy designed to elicit a strong market reaction from such a policy mix (see our July 15 Japan Views). A normal policy mix would break little new ground and would possibly not be viewed that favorably by the market. By alluding in advance to the possibility of a radical measure like helicopter money, the government may be trying to engender a stronger response in the market even if it does not in fact implement such a policy.
We see additional easing measures as uncertain, and cannot deny any possibilities except for the implementation of helicopter money. That said, we believe that they will center on (1) increased exchange-traded fund purchases (to around ¥6 tn/year, from ¥3.3 tn), and (2) deeper negative interest rates.
We think the BOJ will come to further rely on negative interest rates, given that it likely continues to think that the negative rate policy is effective as a forex measure while the BOJ is seemingly becoming more cautious about the marginal effectiveness (vs. associated costs) of large JGB purchases. The Senior Loan Officer Opinion Survey on Bank Lending Practices at Large Japanese Banks, released by the BOJ on July 20, revealed that household mortgage demand has risen sharply, potentially supporting the rate cut decision. However, given criticism from financial institutions, we expect the negative rate on the policy-rate balance (part of excess reserves) to be lowered only slightly to -0.2% from -0.1% (previously we forecast -0.3%), and for the negative rate to apply also to the loan support scheme, a facility designed to promote bank lending (to -0.1%, from 0%). Other possibilities include the BOJ deciding to purchase non-JGBs, such as regional government bonds, FILP agency bonds, government-guaranteed bonds, and MBS, to supplement the JGB purchases.
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Finally, Jose Canseco
BoJ if u want 2% inflation raise ur stupid Nirp rates to plus 4%.Yes up 5 pts.Interest rates are the fuel for inflation smh #canseconomics
— Jose Canseco (@JoseCanseco) July 28, 2016
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