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Takeaway: While the BOJ disappointed short-term market expectations, we still think the outlook for Japanese monetary POLICY is decidedly dovish.

SUMMARY BULLETS:

  • From our purview, Governor Masaaki Shirakawa and his fellow board members met Prime Minister Shinzo Abe & Finance Minister Taro Aso halfway at best on this one amid his constant struggle to protect BOJ independence.
  • On the explicitly dovish front (i.e. incrementally bearish for the yen) is their well-telegraphed +2% CPI target (as forecasted by 21 of 23 economists), their less-telegraphed accelerated time frame (i.e. “at the earliest possible time”) and the fact that the recently revived Council on Economic and Fiscal Policy will now monitor the BOJ’s progress at achieving this end until the target is reached.
  • What we found quite hawkish (i.e. bullish for the yen), relative to expectations, is their commitment to seeing their current ¥76 trillion Asset Purchase Program through to its culmination at the end of calendar 2013, prior to actually implementing the open-ended Asset Purchase Program – which initially targets ¥13 trillion ($146.5B) per month of mostly low-impact securities (¥10 trillion will be Japanese Treasury bills, which are more-or-less cash substitutes in Japan).
  • Forex market participants (speculators are still net short) didn’t like this latest iteration of Delaying the Drugs, which is why into and through this latest BOJ board meeting we have anchored on what is likely to become of Japanese monetary POLICY after Shirakawa and his two deputy governors are replaced in late-MAR/early-APR.
  • All told, our TREND and TAIL bearish thesis on the Japanese yen continues to play out in spades. And while we expect the pace of depreciation to slow over the next couple of months, we do think early 2Q and early 3Q catalysts will  continue to perpetuate a weaker yen over the intermediate term. As we suggested back on DEC 17th, ¥100 on the USD/JPY cross continues to be a reasonable target to hit prior to any major reassessment of Japanese monetary and fiscal POLICY.

With the conclusion of the Bank of Japan’s two-day monetary POLICY meeting overnight, the BOJ and Japan’s Cabinet Office issued a joint statement confirming already-reset market expectations for “price stability” in Japan. The primary deltas on the POLICY front include:

  • Adopting a joint +2% INFLATION target to be achieved at “the earliest possible time”: “The Bank recognizes that the inflation rate consistent with price stability on a sustainable basis will rise as efforts by a wide range of entities toward strengthening competitiveness and growth potential of Japan’s economy make progress. Based on this recognition, the Bank sets the price stability target at 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI).” (source: BOJ; six of nine voted in favor of this change)
  • Adopting open-ended asset purchases to commence in JAN ’14: “With respect to the Asset Purchase Program, after completing the current purchasing method, from January 2014, the Bank will introduce a method of purchasing a certain amount of financial assets every month without setting any termination date. Particularly, for some time, following the introduction of this method, the amount of monthly purchases is specified at about 13 trillion yen, 2 trillion yen of which is JGBs. As a result of these measures, the total size of the Asset Purchase Program will be increased by about 10 trillion yen in 2014 and is expected to be maintained thereafter.” (source: BOJ; unanimous decision)

With the inclusion of these latest measures, Chief Cabinet Secretary Yoshihide Suga was out suggesting that the need to revise the 1998 Bank of Japan Act had “lessened”. From our purview, Governor Masaaki Shirakawa and his fellow board members met Prime Minister Shinzo Abe & Finance Minister Taro Aso halfway at best on this one amid his constant struggle to protect BOJ independence.

On the explicitly dovish front (i.e. incrementally bearish for the yen) is their well-telegraphed +2% CPI target (as forecasted by 21 of 23 economists), their less-telegraphed accelerated time frame (i.e. “at the earliest possible time”) and the fact that the recently revived Council on Economic and Fiscal Policy will now monitor the BOJ’s progress at achieving this end until the target is reached.

What we found quite hawkish (i.e. bullish for the yen), relative to expectations, is their commitment to seeing their current ¥76 trillion Asset Purchase Program through to its culmination at the end of calendar 2013, prior to actually implementing the open-ended Asset Purchase Program – which initially targets ¥13 trillion ($146.5B) per month of mostly low-impact securities (¥10 trillion will be Japanese Treasury bills, which are more-or-less cash substitutes in Japan).

Since delaying the start of such a program is particularly contrary to adopting an accelerated time frame for achieving the now-joint price stability target, we interpret this maneuver as the outgoing Shirakawa's issuance of somewhat of a proverbial "middle finger" to the Cabinet; it appears that he does not want his already-lackluster legacy further tainted by politicized money printing.

Also hawkish for the yen, Economics Minister Akira Amari recently said at the World Economic Forum Davos that the Japanese government has no political intention to guide the yen lower or higher. This bold-faced lie is a clear signal that Japan is increasingly attentive to the heightened political push-back upon their beggar-thy-neighbor policies of late. To the extent they want to calm the markets, they may slow their implementation of further reflationary measures with respect to the next 2-3 months.

Additionally, it was reported that the Japanese government wants to cut its sovereign debt/GDP ratio by half of the FY10 level by FY15 (i.e. three years from now). In addition, fiscal policymakers are said to desire a primary balance surplus by 2020. We won’t even dignify these outlandish targets with any degree of analysis (i.e. Japan’s debt/GDP ratio isn’t going to drop by ~100 percentage points in three years), but just the mere mention of fiscal sobriety out of Japan could and should be interpreted as bullish for the yen – at least in the short term.

All told, currency market (speculators are still net short) didn’t like this latest iteration of Delaying the Drugs, which is why into and through this latest BOJ board meeting we have anchored on what is likely to become of Japanese monetary POLICY after Shirakawa and his two deputy governors are replaced in late-MAR/early-APR. For more details here, please review our 1/16 note titled: “BEST IDEAS UPDATE: RE-SHORTING THE YEN HERE” (a position we’ve since booked for a ~1.7% gain).

QUADRILL-YEN: NOT YET, AT LEAST - 1

It is well-documented that Shirakawa fundamentally believes that Japan cannot overcome deflation with monetary POLICY alone, so we look for the Diet to replace him and his loyal deputies with candidates that support the new Cabinet’s pledge for bold monetary easing. Japanese bureaucrats are right sick of Shirakawa being one-upped by Ben Bernanke and Mario Draghi.

QUADRILL-YEN: NOT YET, AT LEAST - 2

We continue to affirm that Japanese monetary POLICY must, and likely will, get dramatically more aggressive in pursuit of the Abe/Aso agenda (i.e. +5% “monetary math”).

QUADRILL-YEN: NOT YET, AT LEAST - 3

In light of all this, we continue to look towards mid-to-late FEB when the Diet is expected to start reviewing candidates for the pending openings. From our purview, the top three candidates out to an early lead among consensus chatter include former BOJ Deputy Governor Toshiro Muto, Asian Development Bank President Haruhiko Kuroda and former BOJ Deputy Governor Kazumasa Iwata.

QUADRILL-YEN: NOT YET, AT LEAST - 4

Elsewhere in the realm of Japanese POLICY, Prime Minister Shinzo Abe sent a letter to Chinese leaders via an envoy who suggested that the dispute should be shelved and "left for future generations" to resolve; additionally, the envoy requested a face-to-face meeting between Abe and new Chinese Communist Party General Secretary Xi Jinping.

This is the first major step in the right direction with regards to alleviating the Senkaku/Diaoyu Islands dispute and, to the extent it is appropriately follow up upon, should paint a brighter picture for Japanese GROWTH over the intermediate term via increased manufacturing and export activity.

All told, our TREND and TAIL bearish thesis on the Japanese yen continues to play out in spades. And while we expect the pace of depreciation to slow over the next couple of months, we do think early 2Q and early 3Q catalysts will  continue to perpetuate a weaker yen over the intermediate term. As we suggested back on DEC 17th, ¥100 on the USD/JPY cross continues to be a reasonable target to hit prior to any major reassessment of Japanese monetary and fiscal POLICY.

Darius Dale

Senior Analyst

QUADRILL-YEN: NOT YET, AT LEAST - 5