JPY:  What’s Up With The BOJ?

      We expect the BOJ to remain on hold on 16 Jun for three reasons. First, it does not want to be dragged into the 10 Jul Upper House election fray especially since PM Abe is aiming to retain his ruling coalition’s majority. Next, the BOJ may want to avoid acting until the uncertainty over Brexit concerns have dissipated. Third, the BOJ may also want to wait until there is clarity on the US Fed rate hike trajectory. Finally, the BOJ may need to resolve the issue of a revolt from some banks against the negative interest rate policy (NIRP) before embarking on further rate cuts.

      For any additional BOJ measures to be effective, these conditions need to be fulfilled in our opinion. There first needs to be relatively calm risk environment as weak risk sentiments would support safe-haven flows into Japanese assets; next, the UST-JGB spreads need to widen in favor of the US to encourage flows away from Japanese assets towards US ones; and finally there needs to renewed confidence in Abenomics with PM Abe pushing for further liberalization and restructuring of the economy.

      Under our first scenario of positive developments in the economy, no further BOJ easing measures are expected and this is likely to be negative for AXJ currencies and positive for the JPY. In our base case, further easing measures are needed and this should push Japanese funds overseas in the search for yields and fuel risk-supported sentiments in the region, which is likely to be positive for AXJ currencies and negative for JPY. Finally, the “nuclear option”, which includes helicopter money, is an option of the last resort. Using this option could see an even greater outflow from Japan and keep risk sentiments supported.  Asian ex-Japan currencies are likely to benefit under such a scenario but is likely to be JPY-negative.