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Forex Flash: BoJ mulls options on yen-negativity – UBS

In Japan, “foreign bond purchases have never seemed a very likely proposition to its woes. Even if a public-private vehicle were set up to buy foreign bonds, the intention would have been to use it as a deterrent - mere knowledge of its existence would have held back yen bulls.” writes Research Analyst Gareth Berry at UBS.

Second, there is enormous scope to accelerate the pace of yen-denominated asset purchases. After all, the BoJ's footprint in the JGB market is far smaller than that of the Fed or the Bank or England in their respective bond markets. Yes, the "banknotes rule" still prevents the BoJ from holding more JGBs than there are bank notes in circulation. But this has already been skillfully circumvented - JGBs purchased under the APP are exempt from the rule.

Third, the asset purchase mix could be tilted more towards risk assets, boosting the yen negative impact of further easing. Extending the duration of JGBs eligible for purchase remains a strong possibility. Currently, only JGBs with a residual maturity of 1-3 years qualify under the APP. “The latter option above was always a potential yen-negative, though it has become even more so since the BoJ adopted a new approach to guidance on January 22nd. Previously, targets were given for the stock of assets the Bank aimed to accumulate by a given date - much like how the Fed operated during QE1 and QE2. However, now guidance is expressed as a monthly purchase pace - similar to how the Fed operates under QE3.” noted Berry.

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