Assessment to focus on factors that have potentially hampered achievement of the 2% price stability and the cost and benefits of negative interest rates.
We do not expect the Bank of Japan (BoJ) to ease monetary policy as such. However, we expect it to adjust its policy framework by abandoning calendar-based communications on when it expects to reach the 2% target and instead pursue 2% inflation 'at the earliest possible stage'. We expect the BoJ to maintain its negative interest rate policy and keep the door open for additional rate cuts in the future. In addition, we expect it to adopt a more flexible approach to its quantitative target for annual increases in the balance of JGB purchases.
In our main scenario, we think that the BoJ will disappoint relative to market pricing, suggesting that USD/JPY is likely to trade lower on the announcement and temporarily fall back for a new test of the 100 level.
On a 3-12M horizon, we still do not see any strong case for a trend in USD/JPY. We target USD/JPY at 102 in 3M and 104 in 6-12M. However, we see tail risks skewed to USD/JPY upside in the event of a surprise move from the BoJ and/or the Fed, and we think USD/JPY risk reversals offer an attractive risk/reward when positioning for a higher USD/JPY.
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