BoJ: Kuroda’s curve ball - Westpac

Sean Callow, Research Analyst at Westpac, suggests that the dust is beginning to settle on an exceptionally busy 48 hours for central banks, with policy decisions in Tokyo, Washington, DC and Wellington and while the Fed and RBNZ were very much as expected but once again, the BoJ delivered a surprise, even though we did expect the yen to rise.

Key Quotes

“There had been reports that this week the BoJ might skew its JGB purchases towards shorter maturities, steepening the yield curve to help take pressure off banks, life insurers etc. As it happened, the BoJ was even more focused on the yield curve than expected, announcing “QQE with Yield Curve Control”. This will mean persisting with the same -0.1% deposit rate and money creation to fund purchases of bonds and other assets, but now with the extra target of keeping the 10 year JGB yield close to “the current level (around zero percent).”

This is a historically rare step that will at least have the advantage of reducing the volatility depicted across. But overall, the BoJ’s new approach is likely to be seen as insufficient to boost inflation towards the 2% target, let alone beyond it as they now hope. This points to USD/JPY slipping towards 98 in the days ahead, dragging much of USD/Asia with it.

Of course the FOMC added to the reasons to be bearish USD/JPY, holding steady for a sixth straight meeting even though “the case for an increase in the federal funds rate has strengthened.” A Dec rate rise is still our base case but is hardly assured. We expect USD to keep struggling near term. This should help AUD/USD push back above 77 cents, though April’s highs above 0.78 are likely to remain intact.”