BoJ JGB Buying Unchanged
The Bank of Japan kept market participants waiting much longer than usual for their overnight policy decision. The delay prompted speculation that a further round of easing might be in the pipeline, but USDJPY dropped 30 pips when no material shift in stance emerged. Crucially, unlike the previous meeting, there was no change to the BoJ’s JGBpurchase ambitions: rinban operations will continue at the same pace, and purchases of shorter-dated JGBs by the asset purchase facility will also continue as before. There were four very minor tweaks to a second-tier lending facility though. This gave it a new lease of life but the adjustments were otherwise insignificant and well below the threshold needed to influence the yen. Attention now shifts to Tuesday’s FOMC meeting. We do not expect any shift in policy stance given the Fed remains in wait-and-see mode as it scrutinises incoming economic data. The lack of a postmeeting press conference and the absence of new quarterly forecasts further reduces the scope for communicating any shift in opinion. Our US economists expect little new information about policymakers’ thought processes or the possibility (or design) of any further easing. However, signs of labour market improvement will likely be acknowledged, and this may contribute to a slightly more upbeat tone. For USDJPY the key consideration is whether the policy statement will say enough to keep US 2y yields moving higher. These broke and closed above 32 bp yesterday setting a 7-month high, and any further gains will give USDJPY a further incremental boost. Our baseline scenario assumes the Fed will stay on hold well into next year, ultimately giving way to a rate hike in H2 2013 – well before the BoJ. This divergence underpins our bullish call on USDJPY towards 85 on a three-month horizon and 90 in 2013. Overnight, USDJPY traded between 81.97-82.49, with EURUSD at 1.3145-1.3191.
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UBS Investment Bank