BOJ backs away from the brink – TDS

Mazen Issa – Senior FX Strategist at TD Securities (TDS) – offered his takes on Thursday's Bank of Japan (BOJ) monetary policy update, which turned out to be a rather non-event for the market.

Key Quotes:

As we expected, the BOJ left its main policy levers unchanged and changed forward guidance. Importantly, the BOJ adopted open-ended forward guidance with an explicit link to price momentum and a pledge to keep rates at present or lower levels.
 
Despite this change, we do not think the BOJ is willing to cut anytime soon. Instead, the BOJ is trying to achieve the spirit of a cut without employing it - and dare we say, the illusion of easing. NIRP remains widely unpopular and delivering lower rates is inconsistent with the BOJ's new focus in safeguarding financial stability.
 
The BOJ's view around inflation have evolved and become more pragmatic. By explicitly linking price momentum in its forward guidance, the BOJ decreases the importance of trying to achieve 2% inflation even though that remains their official target aim (however lofty that may seem).
 
We see little market impact at this time though we do think that the BOJ will likely rely on low cost strategies to enforce YCC flexibility/financial stability to nudge 10yr JGB yields closer to 0%. This includes scaling down JGB purchase amounts in auctions. We look for USDJPY to consolidate in a broad 107/109 range.