We are thinking about last week’s actions from the BoJ along two dimensions. First, we continue to see the substantive changes in a positive light, given that the shift to yield targeting effectively ends the JGB scarcity debate and sets the stage for “QQE infinity.” Second, the overwhelmingly negative market reaction shows just how much sentiment has turned. The reality is that – with inflation so far below target – markets have no patience for half measures. This FX Views weighs these countervailing forces and makes three points. First, there is lots of speculation that the fiscal stimulus will help the BoJ meet its inflation forecast. We disagree. Only a substantial weakening of the Yen can do that. Second, the comprehensive assessment talked a lot about “adaptive expectations,” the fact that the deflation mindset is still strong. All the more reason for the BoJ to keep shocking markets, arguably the intention behind the switch to yield targeting. Third, the market is looking to punish incrementalism with a stronger Yen. Any sign that the BoJ has given up on aggressive easing could see $/JPY move below 100, threatening to unravel all progress under Governor Kuroda. Our core view is that there is only one way forward, which is to weaken the Yen. We continue to see $/JPY at 108, 110 and 115 in 3-, 6- and 12-months, respectively. The main risk is that the BoJ misreads markets and thinks it can stay on hold with $/JPY stable. It cannot. It’s the (Y)ENd game.
Exactly. Markets are backing the BoJ into a deflationary corner. It will have to cut deeply negative.
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
