UBS: Buy USD/JPY on Outsized Bank of Japan Action

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Daiju Aoki, Economist
Justin Knight - Strategist
Nishay Patel, CFA - Strategist

We expect the BoJ to ease policy at the April meeting

We believe that the BoJ will ease further on 28 April, an event to which we attach a probability of about 65%.

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.

Economic sentiment and market conditions have worsened considerably

Conditions are no longer such that the BoJ can stand by if it is to maintain expectations of achieving its 2% inflation target.

The currency has strengthened considerably, manufacturing conditions in the Tankan survey have deteriorated sharply and inflation expectations have also fallen.

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An easing of fiscal policy also to come later in the 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. The Japanese government seems keen to demonstrate its leadership to other nations by implementing a large monetary policy stimulus.

In addition, we expect a supplementary budget and a further delay to the consumption tax hike in April–May.

A fiscal and monetary policy mix at the same time would likely help support both corporate and market sentiment.

What is the likely market reaction?

A strong easing of a 20bp cut in the IOER and a ¥20tn increase in QQR as we expect should lead to 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.

In rates markets we would initially expect some bull-flattening at the long end of the curve, as an increase in QQE is likely not fully priced in.

However we would expect long-term interest rates to rise again with rising inflation expectations over time. For equities, we estimate that TOPIX would rise by about 5%. The manufacturing industry, finance, and real estate sectors should outperform other sectors.