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Forex Flash: BOJ aggression surpasses high market expectations - BTMU

FXstreet.com (Barcelona) - Derek Halpenny, European Head of Global Markets Research at the Bank of Tokyo Mitsubishi UFJ notes that there certainly cannot be any sense of disappointment with the BOJ monetary policy decision which was clearly aggressive and will immediately dispel concerns over the potential for the BOJ to remain cautious.

He sees that the yen is sharply weaker and he recommends that investors should expect further declines over the coming days a weeks. He writes, “Our one-month forecast of 95.00 now looks too low.” He continues to note that the BoJ today laid out its introduction to “quantitative and qualitative monetary easing”. The statement set a time horizon for achieving a 2.0% inflation level “of about two years” and will be obtained by : a) The adoption of the monetary base control which is expected to result in the monetary base rising from JPY 138trn at the end of 2012 to JPY 270trn at the end of 2014; b) an increase in JGB buying to around JPY 7trn per month and an extension of maturities purchased out to 40 years which will take the average maturity held by the BOJ out from slightly less than three years to “about seven years”; c) an increase in ETF and J-REITs. These measures were all passed by
unanimous votes.

On the final step, he writes, “a commitment to continue “as long as necessary for maintaining” the 2% target was passed by an 8-1 vote. This final step is also very aggressive – it would appear that this monetary stance will be continued not just to achieve the target but until the BOJ is confident of a 2% inflation level being sustained. The other measures were broadly expected. Further, he adds that the APP was scrapped and the rule limiting JGB holdings to below banknotes in circulation has been scrapped “temporarily”. However, he asks, “But how this will be temporary I find hard to understand.” JGB holdings are estimated to jump from JPY 89trn at the end of 2012 to JPY 190trn at the end of 2014. He feels that with the BOJ now buying out to 40 years there is a high risk that the financial markets will start to conclude that the BOJ is moving toward debt monetisation. The net JGB annual purchase by the BOJ of about JPY 50trn is about 16% more than what the government is projecting as its net issuance in the fiscal year just started.

He finishes by commenting that there can only be one conclusion to today´s BoJ policy announcement, that the BoJ under Kuroda means business and these aggressive steps will prove important in shaping expectations about the direction of Yen and inflation expectations. He writes, “We have stated that Japanese Life Insurance companies and other Japanese investors’ behaviour in regard to foreign currency hedging and general risk appetite would be important for the yen. Today’s decision may well convince the Japanese investing community – sceptical until now – of a real shift that will help ensure that over time a trend of yen weakness is now established.”

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