The Bank of Japan (BoJ) is increasing its purchases of ETFs but has kept the policy interest rate and bond purchase programme unchanged at -0.1% and JPY80trn, respectively. The BoJ is keeping the door open for additional easing in September as it awaits the government's fiscal easing package.
We do not see today's lack of action as a token that the BoJ is done but given that the BoJ refrained from cutting interest rates further into negative territory, we no longer expect it to cut interest rates further.
Overall, the announcement is a disappointment and the BoJ's decision is negative for risk and global bond markets. However, the market reaction has been relatively modest given the significant disappointment: USD/JPY dropped 2.5 figures and initially dipped below 103. Markets are still speculating on a large fiscal stimulus package, which is likely to be announced next week.
We expect USD/JPY to remain heavy in coming weeks, targeting 100 in 1M. Longer term, the outlook for USD/JPY very much depends on the size of the fiscal package and the BoJ's subsequent policy response at the next MPM on 21 September. We are currently reviewing our 3-12M USD/JPY forecast but in general we see less upside potential in the cross, as we no longer expect further negative interest rates.
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