BOJ’s additional easing and MOF intervention scenario

BOJ’s additional easing and MOF intervention scenario

The BOJ today decided to increase the size of its asset purchase program by JPY10trn to further ease monetary conditions. In addition, the central bank changed its statement that “the understanding of medium- to long-term price stability is in the range of approximately 0 and 2 percent,” asserting instead that it “sets a goal [for price stability] at 1 percent.” This is very close to an inflation target, and bolsters the BOJ’s message that it is committed to maintaining its easing stance for the long term.

This additional easing was a big surprise for the market, which did not expect any change. Moreover, given that media reports normally speculate that easing is in the offing before the meeting, we suspect that the BOJ purposely and carefully prepared this surprise. This particular time was chosen less because of domestic economic conditions than the need to address the immediate risk of JPY appreciation due to deteriorating EUR conditions resulting from Greece’s problems and higher expectations for QE3 in the US. Of course, Japan’s weak Oct-Dec GDP data, released yesterday, may have helped to make the case for additional easing.

The main implication for the FX market is that the possibility of a FX intervention has now increased. All of the MOF’s four JPY-selling interventions since September 2010 were carried out immediately after the BOJ took additional easing steps. The textbook interpretation of this would contend that the government and BOJ are working together to prevent JPY from strengthening, which is, after all, the main risk factor for the Japanese economy. But I suspect that it is driven by the G7 rule that currency-selling intervention without central banks’ easing effort will not be tolerated. The BOJ’s move today can be seen as freeing up the MOF to carry out a JPY-selling intervention when it is deemed appropriate.

That said, we do not expect a JPY-selling intervention when JPY is in the 77 range against USD. The US Department of the Treasury’s Report to Congress on International Economic and Exchange Rate Policies released last December demonstrated that the US had not supported Japan’s unilateral interventions because “exchange market conditions appeared to be operating in an orderly manner and volatility in the yen-dollar exchange rate was lower than in, for example, the euro-dollar market.” We believe an intervention cannot be justified unless JPY strengthens further. On the other hand, given that most Japanese exporters have set estimated exchange rates at 77-78, we anticipate a scenario in which MOF would intervene at USD/JPY in the 74-75 range to bring it back to the 77-78 range. Currently, USD/JPY has recovered to the 78 range, but with the fiscal year drawing to a close and many uncertainties clouding the outlook, this could offer a brief selling opportunity for investors interested in selling USD/JPY.