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BoJ staying the course – GS

FXStreet (Barcelona) - According to the Analysts at Goldman Sachs the market is not pricing effectively BoJ’s determination and ability to push inflation higher in spite of the BoJ expanding its quantitative and qualitative easing program on October 31.

Key Quotes

“In response to the deceleration in inflation due to weaker domestic demand and the decline in oil prices, the Bank of Japan expanded its quantitative and qualitative easing program (QQE) on October 31. The BoJ announced the continuation of QQE for as long as necessary to reach and maintain the 2% inflation target in a stable manner; a more ambitious target for the monetary base (up by JPY80trn per year, from JPY60-70trn previously); an increase in the size of asset purchases; and an extension of the average maturity of Japanese government bond (JGB) purchases.”

“Although the BoJ has reinforced its strong commitment to reflate the economy, the 1-year inflation rate in the period spanning two to five years in the future is still trading close to 1%, or half of the BoJ’s 2% target.”

“We have a more bullish view on Japanese inflation and think that the market is not pricing adequately the BoJ’s determination and ability to push inflation higher.”

“By contrast, we remain cautious on the outlook for nominal JGBs and we have lowered our 10-year JGB yield forecasts by 10bp across the forecast horizon and expect it to be 80bp at the end of 2015, and reach 1.60% at the end of 2018.”

“While the BoJ’s removal of long-term duration will continue to pull yields down, we expect an increase in the term-premium component led by expectations of higher future growth and inflation. Higher 10-year bond yields overseas and a rebalance in pension fund portfolios should also contribute to a sell-off in long-term JGBs, and, overall, the net effect should be bearish for Japanese duration.”

“In the coming months, we expect the monetary stimulus to continue to support these dynamics. A further exchange rate depreciation (we forecast USD/Yen at 130 at the end of 2015) should lead to an acceleration in near-term inflation and offset the impact of the decline in energy price. This, in turn, should continue to help to change households’ expectations of future inflation, putting pressure on wages.”

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