FX Research – BoJ’s zugzwang

Good Afternoon Readers!

v Japanese yen (JPY) is trading at a 17-month high. Negative interest rate policy (BIRP) has the opposite effect and is said that Abenomic is losing its firepower. These conditions are resetting market expectations over JPY.

v We argue that authorities will be pressured to act once JPY falls below 105, more so if the pace and speed of appreciation is driven by speculative flows. Cabinet Office’s recent estimate of breakeven exchange rate for Japanese corporates is around 103.2 and hedging flows by Japanese exporters are intensifying as the currency breaks below the budget rate of around 112.

v Abe’s popularity ratings, which are showing sign of easing since November 2015 will also be part of the consideration while BoJ’s board are increasingly filled with Kuroda’s supporters. We do not discount possibility of large scale BoJ equity purchases and renewed fiscal stimulus along with other ground breaking policy experimentation even at the timing ahead of G-7 summit in late May 2016.