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11 Dec 2015
Expect more BOJ easing in Jan, yen to depreciate further - Citi
FXStreet (Mumbai) - Contrary to Goldman Sach’s view that the Bank of Japan (BOJ) may push back easing to April 2016, Citi Japan economists expect the central bank to add further monetary stimulus at the January meeting.
Key Quotes:
BoJ to implement further easing given the current stagnant state of the Japanese economy and inflation
The government will enact the supplementary budget immediately after the regular Diet session starts on Jan 4
We believe the Jan 28/29 meeting of the Monetary Policy Board will be the best timing for the BoJ to take an action. This would be the last chance for the bank to influence wage negotiations held between Feb and Mar.
Additional easing to consist of a JPY 1tn per month increase in JGB purchases and a JPY 2tn per year increase in ETF investments
Citi’s outlook on yen
Leading politicians like Prime Minister Abe or Chief Cabinet Secretary Suga are now distancing themselves from JPY depreciation, as it is associated with real wage losses from imported inflation
A rise in USDJPY much beyond 125 before next July's Upper House election would even become a political problem
If USDJPY goes well beyond 125 before the Jan 28/29 meeting, the BoJ may choose ETF purchases only
We don't yet anticipate USD selling by the MoF
The GPIF could start to hedge its FX exposure, as could other public pension funds and the Japan Post Bank that also greatly increased foreign investments in recent years. An increase in the FX hedging ratio would be welcome by the government authorities if it capped JPY weakness.
Our fundamental mode estimates USDJPY fair value at around 112
Policy divergence between Japan and the US will push up the USDJPY equilibrium over time, but the JPY Undervaluation could limit rapid depreciation of the Yen
Many real money investors are reluctant to see a currency that is now so fundamentally undervalued. We expect USDJPY likely to peak around 127-128 after the BoJ's next action, supposed in January, and then be pulled back toward 120 as the markets finish to price in the positive factors for the US dollar in H2 2016 as we suppose.
Key Quotes:
BoJ to implement further easing given the current stagnant state of the Japanese economy and inflation
The government will enact the supplementary budget immediately after the regular Diet session starts on Jan 4
We believe the Jan 28/29 meeting of the Monetary Policy Board will be the best timing for the BoJ to take an action. This would be the last chance for the bank to influence wage negotiations held between Feb and Mar.
Additional easing to consist of a JPY 1tn per month increase in JGB purchases and a JPY 2tn per year increase in ETF investments
Citi’s outlook on yen
Leading politicians like Prime Minister Abe or Chief Cabinet Secretary Suga are now distancing themselves from JPY depreciation, as it is associated with real wage losses from imported inflation
A rise in USDJPY much beyond 125 before next July's Upper House election would even become a political problem
If USDJPY goes well beyond 125 before the Jan 28/29 meeting, the BoJ may choose ETF purchases only
We don't yet anticipate USD selling by the MoF
The GPIF could start to hedge its FX exposure, as could other public pension funds and the Japan Post Bank that also greatly increased foreign investments in recent years. An increase in the FX hedging ratio would be welcome by the government authorities if it capped JPY weakness.
Our fundamental mode estimates USDJPY fair value at around 112
Policy divergence between Japan and the US will push up the USDJPY equilibrium over time, but the JPY Undervaluation could limit rapid depreciation of the Yen
Many real money investors are reluctant to see a currency that is now so fundamentally undervalued. We expect USDJPY likely to peak around 127-128 after the BoJ's next action, supposed in January, and then be pulled back toward 120 as the markets finish to price in the positive factors for the US dollar in H2 2016 as we suppose.