BoJ's inaction will see USD-JPY move lower - HSBC

Research Team at HSBC, suggests that with the BoJ unwilling to deliver and Japanese authorities seemingly reluctant to intervene in the FX market, the market will question the central bank's resolve for a weaker JPY.

Key Quotes

“Rhetoric alone is unlikely to suffice. Despite repeated remarks about their concerns over the strength of the currency, neither the central bank nor the government has taken assertive action. The BoJ failed to foster JPY weakness following its introduction of negative interest rates and has consistently under-delivered in its last three meetings. So it is becoming increasingly apparent that the BoJ is running out of policy tools to weaken the currency. At a time when the Fed also appears unwilling to hike, the BoJ's inaction will see USD-JPY move lower.

The BoJ’s unwillingness to deliver runs contrary to the view that risk appetite will be supported by increasingly loose policy. With a lack of additional stimulus globally, the JPY safe-haven allure may entice investors once again. We have been looking for USD-JPY to move lower through the rest of the year, given the inability of the authorities to deliver significant policy looseness. We see USD-JPY at 95 by the end of 2016.

For EM currencies, the lack of delivery by the BoJ and resultant JPY strength will be most profound for North Asian currencies – particularly the KRW and the TWD. Given that Korea and Taiwan are fierce export competitors with Japan, the BoJ's decision not to ease monetary policy should alleviate some concerns that these central banks would actively aim to competitively weaken their currencies.

For gold, the decision is only modestly bullish at best. The positive JPY-gold relationship is strongest – and most positive for gold – when the JPY is bought as a safe haven currency. Safe haven demand generally boosts both the JPY and gold simultaneously. Since anticipated JPY strength here is more about disappointment vis-à-vis the BoJ's actions, and not safe haven buying, we expect the commensurate positive impact on gold may be muted.”