JPY: Yen rebounds as BOJ actions highlights policy constraints - MUFG

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 18, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Derek Halpenny, European Head of GMR at MUFG, suggests that the USD/JPY surged to an intra-day high of 123.56 in the immediate aftermath of the BOJ announced policy changes but the rebound of the yen since then reflects the fact that the steps taken by the BOJ were more technical in nature and indeed were taken in order to ensure the continued extent of monetary easing is maintained.

    Key Quotes

    “There were two elements to today’s announcement – 1) Measures to support firms’ investment in physical and human capital; 2) Measures to facilitate smooth implementation of QQE.

    Under measure 1) the BOJ today decided to a) establish a new program for purchases of ETFs. (6-3 vote). The annual pace of buying in this program will be JPY 300bn and will augment the existing JPY 3.0trn program. ETF purchases will focus on those linked to the JPX-Nikkei Index 400. The program will begin in April 2016 and crucially aims to offset the sale of equities under a previous program the BOJ ran in order to maintain financial market stability. The BOJ also decided to b) enhance the fund-provisioning measure to support strengthening economic growth. Under this program ‘Firms that are proactively making investment in physical and human capital’ was added to an eligible list. Finally under the first measure the BOJ decided to c) extend the application period for the Loan Support Program.

    Under element 2) from today’s announcements the BOJ decided to a) expand the eligible collateral for Bank credit. Because of ongoing JGB purchases banks are running low on eligible collateral and now banks can use foreign currency denominated loans and housing loan portfolios. The BOJ also decided to b) extend the average maturity of JGB purchases from around 7-10yrs to 7-12yrs (6-3 vote). Finally, the BOJ decided to c) increase the maximum amount of each J-REIT purchased from 5% to 10% of total issuance (6-3 vote).

    There are two ways of looking at today’s measures taken. The first is that it merely underlined the constraints that are apparent in implementing additional monetary policy measures. The steps are mostly technical in nature to ensure that the current monetary stance can continue to be implemented smoothly. Or perhaps second, that the BOJ is beginning to see increased downside risks to the economy and see at least the need for the current measures to remain in place for a long time yet or perhaps even they see the need for additional easing to be implemented going forward and these technical measures will help in that.

    Governor Kuroda has stated today that the steps taken were “pre-emptive and preparatory”. Preparation for what? We currently do not expect additional BOJ monetary easing and hence we lean toward today’s actions highlighting the constraints in continuing with such an aggressive monetary easing stance. “Pre-emptive and preparatory” action may refer to the BOJ seeing the difficulties that lie ahead in terms of being able to implement the current policy stance.”
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