UBS expects BoJ easing: Buy USDJPY


27 April, AtoZForex, London – The Swiss global financial services company UBS foresees BoJ easing at the coming meeting scheduled on 28th of April, assigning probability of approximately 65%.

UBS expects BoJ easing

“We expect a powerful package of ¥20tn in increased QQE purchases and a cut in the interest on excess reserve rate (IOER) of 20bp to -0.30%. The BoJ is also likely to apply a negative rate on its lending facility,” UBS projected.

Economic sentiment and global markets have worsened considerably, such that the BoJ can no longer stand by and maintain expectations to reach its 2% inflation target. In addition, the JPY has strengthened considerably, as safe haven currencies were in demand, manufacturing conditions in the Tankan survey have deteriorated and Japanese inflation expectations have fallen.

Fiscal policy easing to follow in spring

“On the timing of the move, we think Japan also needs to show it is working to avoid a global recession in the run-up to hosting the G7 summit on 26 – 27 May,” UBS added.

The Japanese government seems keen to demonstrate its leadership by implementing a large monetary policy stimulus. In addition, UBS expect a supplementary budget and further delay to the consumption tax hike in April – May. A combination of fiscal and monetary policy would likely help support both corporate and market outlook.

BoJ easing market impact

A 20bp cut in the IOER and a ¥20tn increase in QQR should result in a strong move upward in USDJPY.

“This would serve to underline our year-end forecast of 122, something which might be under threat with a less-active BoJ,” UBS noted.

At the same time, in rates markets, UBS expects BoJ easing to result in some bull-flattening at the longer end of the curve, as an increase in QQE is likely not fully priced in yet. “However we would expect long-term interest rates to rise again with rising inflation expectations over time,” UBS added.

For equities, the investment bank estimates that TOPIX would appreciate by approximately 5%. While the manufacturing industry, real estate, and finance should outperform other sectors.

Also see: Brexit causes GBP further upside risk

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