Eye's on JPY Policy

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The BoJ's two-day meeting which begins on Tuesday is likely to attract a good deal more attention than usual. Not only has government pressure on the BoJ intensified in recent weeks, but a number of press articles have speculated that the policy board is poised to introduce additional steps aimed at running an even looser form of monetary policy.

The 3m loan facility introduced at December's emergency BoJ meeting remains the centre of attention, with suggestions that the ceiling on the facility could be doubled from ¥10 tn to ¥20 tn, or that the maturity of loans offered could be extended from three to six months. The alleged intention is to lower front end yields in a bid to both stimulate domestic lending and to weaken the yen, and thereby reduce deflationary pressures in the economy.

Finally, key to the FX consequences of any decision will be the reaction of front-end yields. With these already so close to the policy rate of 0.1%, significant additional yield compression looks somewhat unlikely. Although USDJPY could rise substantially on the news that policy is being eased further, without the fundamental underpinnings of a wider US-Japan yield differential, any excessive gains in the pair are likely to be short-lived.

This scenario plays into our long only AUDJPY buying strategy.

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Blog Source: UBS, Bloomberg, Chris Lori

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