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29 Jan 2016
BoJ cuts rates to negative, more easing expected - UBS
FXStreet (Córdoba) - The Bank of Japan (BoJ) announced a surprise shift to negative interest rates on excess reserves (IOER) following its January policy meeting even though BoJ Governor Haruhiko Kuroda had previously dismissed such a move. According to the UBS analyst team, the BoJ message renewed the dovish tone and they recommend to overweight the USD against an underweight position in the JPY
Key Quotes
“The USDJPY there upon spiked above 121, before retreating slightly to a current trading level of 120.5. The equity market also rallied on the news by around 3%. We anticipate more easing to come from the BoJ in coming months; hence we are targeting a USDJPY of 127 on a 3–6 month basis.”
“So what has the BoJ done? First, it cut IOER by 20bps, to –10bps from +10bps. The quantitative and qualitative easing program remains unchanged, continuing with Japanese government bond (JGB) purchases at a rate of JPY 80 trillion per year, with ETF and REIT purchases as scheduled. Second, the BoJ did not introduce a lower bound for JGB yields on its purchase operations. Third, it introduced a three-tier system on the IOER, which is clearly better for risk sentiment, since it can offset some of the negative drag on bank profitability, while at the same time allowing the BoJ to cut more aggressively if need be.”
“The amount of actual transactions to which a negative rate will apply remains an open question, but more important presently is that the BoJ has clearly stated its readiness to consider more aggressive cuts if necessary, which we judge as a renewed dovish tone.”
“Recent poor economic activity data, the slide in crude oil prices and persistent weak inflation, while in line with expectations, has moved the BoJ's hand, particularly as indicators are pointing to a negative 4Q15 GDP number. Also, we see this change in the policy framework as a clearer indication of its commitment to achieve a 2% inflation target in the medium term. Accordingly, we are maintaining our recommendation to overweight the USD against an underweight position in the JPY.”
Key Quotes
“The USDJPY there upon spiked above 121, before retreating slightly to a current trading level of 120.5. The equity market also rallied on the news by around 3%. We anticipate more easing to come from the BoJ in coming months; hence we are targeting a USDJPY of 127 on a 3–6 month basis.”
“So what has the BoJ done? First, it cut IOER by 20bps, to –10bps from +10bps. The quantitative and qualitative easing program remains unchanged, continuing with Japanese government bond (JGB) purchases at a rate of JPY 80 trillion per year, with ETF and REIT purchases as scheduled. Second, the BoJ did not introduce a lower bound for JGB yields on its purchase operations. Third, it introduced a three-tier system on the IOER, which is clearly better for risk sentiment, since it can offset some of the negative drag on bank profitability, while at the same time allowing the BoJ to cut more aggressively if need be.”
“The amount of actual transactions to which a negative rate will apply remains an open question, but more important presently is that the BoJ has clearly stated its readiness to consider more aggressive cuts if necessary, which we judge as a renewed dovish tone.”
“Recent poor economic activity data, the slide in crude oil prices and persistent weak inflation, while in line with expectations, has moved the BoJ's hand, particularly as indicators are pointing to a negative 4Q15 GDP number. Also, we see this change in the policy framework as a clearer indication of its commitment to achieve a 2% inflation target in the medium term. Accordingly, we are maintaining our recommendation to overweight the USD against an underweight position in the JPY.”