FX Flash
Group Economics Macro & Financial Markets Research
29 July 2016
BoJ ‘inaction’ - JPY strengthens Roy Teo Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com
JPY surge after BoJ ‘inaction’ Kuroda passes baton to Abe Fiscal stimulus a bazooka? USD/JPY downside risk towards 100
JPY surge after BoJ ‘inaction’ The Japanese yen (JPY) surged to below 103 against the US dollar after the Bank of Japan (BoJ) left the policy rate (7-2 vote) and monetary base target (8-1 vote) unchanged today. This disappointed market expectations that the BoJ will lower policy rates and increase the size of its qualitative and quantitative easing programme. However the BoJ voted 7-2 to expand its target for ETFs purchases to 6 trillion yen (from 3.3 trillion yen) and doubled the US dollar lending program to USD 24bn. Under this lending program, the BoJ will provide US dollar funds for a period of up to 4 years to support Japanese firms’ overseas activities through financial institutions. The BoJ will also establish a new facility in which it lends Japanese government securities to financial institutions against their current account balances with the Bank so that these securities can be pledged as collateral for the US dollar funds operations. The BoJ said that they will conduct a comprehensive assessment of the economy at the next monetary policy meeting on 21 September. Kuroda passes baton to Abe The BoJ maintained their view that inflation will reach around 2% during fiscal year 2017 due to effects of economic stimulus measures. However the projected rate of increase in inflation is lower for the current fiscal year 2016. This is due to the appreciation of the yen. Nevertheless, the output gap is expected to move into positive territory at the end of fiscal year 2016. In our view, today’s ‘inaction’ by the BoJ has two messages. The BoJ has implied that there are limits to further increasing the size of JGB purchases and lingering concerns that more negative policy rates could backfire. Hence the BoJ has passed the baton to the government to take strong bold fiscal measures and reforms to stimulate the economy. Fiscal stimulus a bazooka? Earlier this week, it was reported that a fiscal stimulus package of 28 trillion yen (6% of GDP) could be passed on 2 August. This is significant. However we think that new actual spending this year is likely to be much smaller (different sources quoting 2 to 9
Insights.abnamro.nl/en
2
FX Flash - BoJ ‘inaction’ - JPY strengthens - 29 July 2016
trillion yen range) with the total stimulus package including planned expenditure over several years. USD/JPY downside risk towards 100 In the absence of a bazooka fiscal stimulus announcement next week, we think that it is more likely that the yen will strengthen towards 100 rather than weaken to the recent lows of around 107.50 against the US dollar. Our third quarter target for USD/JPY is 100.
3
FX Flash - BoJ ‘inaction’ - JPY strengthens - 29 July 2016
Find out more about Group Economics at: https://insights.abnamro.nl/en/
DISCLAIMER ABN AMRO Bank Gustav Mahlerlaan 10 (visiting address) P.O. Box 283 1000 EA Amsterdam The Netherlands
This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics. The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer. No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such information. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product –considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material. © Copyright 2016 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO").