Bangkok--2 Feb--HSBC Thailand
The BoJ's recent rate cut is more important for its signalling value than the size of the easing itself, which is small
With inflation set to undershoot the BoJ's forecasts, we expect cuts of another 20bp each in July and November; but another large-scale boost to the asset purchase target remains unlikely
We therefore maintain our current view of USD-JPY at 120 by Q2, and reiterate our year-end forecast of 115
The BoJ joins the negative rates club. The Bank of Japan policy board delivered a major surprise at its first meeting of the year by announcing a new monetary policy framework involving negative interest rates. Under this new "hybrid" policy framework, the BoJ will start charging a rate of -0.1% on a portion of financial institutions' deposits with the central bank while still maintaining its asset purchases under the JPY80trn/year monetary base target.
The effects of negative rate policy will be small at first. Though the move towards negative interest rate policy (NIRP) signals a big change for the central bank, the impact on market rates has been smaller than the headline cut suggests: under the BoJ's multi-tier deposit rate system, only a small portion of financial institutions' reserves will be subject to the negative rate, at least initially.
Main purpose of policy change is the signalling effect. Contrary to the BoJ's hopes, we think the negative interest rate policy will have a limited impact on the real economy (though it is likely to stoke asset price inflation). Instead, the signalling effects of the new policy are much more important, as is the role of marginal negative rates in spurring currency weakness (or at least limiting JPY appreciation pressures).
Further rate cuts in the pipeline. The policy board slashed its CPI forecasts and pushed back the timing of 2% inflation by another six months, to H1 FY2017. But their projections still look too optimistic, given that the boost from the new negative rate policy is likely to be limited. We expect the BoJ to cut the interest rate on the policy-rate balance by another 20bp each at the July and November policy meetings, taking the marginal deposit rate to -0.5% by year-end.
Maintaining our end-2016 USD-JPY target at 115. The announcement effect of the BoJ's new negative rate policy and the prospect of further cuts have arrested the momentum lower in USD-JPY. However, we do not believe this policy shift will engender further yen weakness; this was certainly the case in the three other major currencies whose central banks have employed negative rates. We therefore maintain our current view of USD-JPY at 120 by Q2 and reiterate our year-end forecast of 115.