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Market Too Quick To Write Off BoJ Surprise; Buy USD/JPY

The market greeted last Friday’s (December 18) announcement by the Bank of Japan of enhancements to its QQE program with shrugged shoulders, notes Goldman Sachs.

“The JPY is stronger against the USD, and a common response is this latest action represents the limit of the BoJ’s current capacity and willingness to ease. We think this is wrong. Camouflaged as a ‘technical adjustment’ the BoJ has delivered a small but significant easing, indicating their ongoing commitment to reflate the economy and underscoring BoJ/Fed policy divergence in the week of the Fed’s historic rate hike,” GS argues.

For us, these additional measures are not a symbol of impotence, but a reiteration of the BoJ’s commitment to achieving its objectives by future-proofing and improving the effectiveness of the current QQE program.

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We push back on expectations that the BoJ is unlikely to ease further in the near-term – our Japan economists retain their forecast for upcoming easing in April to counter the declines in inflation expectations. And although there is concern that the split vote (6-3 in favour) on the measures taken on Friday indicate a lack of enthusiasm on the Policy Board for renewed stimulus, we would point to the obvious counter-example of the October 2014 QQE2 announcement, which was taken with a 5-4 majority. This latest meeting does not represent the ‘last gasp’ of the BoJ,” GS adds.

We think the BoJ is closer to easing further to attempt to achieve a successful reflation than it is to giving up altogether, and so we continue to expect $/JPY higher.

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