The Bank of Japan can surprise the markets at any moment
In The Art of War, Sun-Tzu recommends to behave predictably for a long time to strengthen the effect of surprise. The Bank of Japan has already used his advice several times. After the market got used to buying bonds within the quantitative easing program, the BoJ shocked it with a novelty - the policy of managing the yield curve. After the investors got accustomed to the range of -0.1% / + 0.1% for 10-year bonds, it expanded it. This was initially perceived as the first step towards normalization, but then the market realized that the central bank increased its room for maneuver, which resulted in the growth of the USD/JPY. The ETF purchases program led to the fact that the regulator entered TOP-10 shareholders in 70% of the issues related to the first section of the Tokyo Stock Exchange issuers. It can influence the decision-making, including on increasing the salary. However, here again the BoJ has the opportunity to enhance the effect of surprise.
Dynamics of ETF purchases by the Bank of Japan
Source: Financial Times.
We are talking about the so-called managed points, when the volume of purchases of securities of specialized exchange funds varies depending on the situation on the market. As a result, the central bank can accelerate the growth process of stock indexes, or, conversely, smoothen their decline. Given the existing correlation between the yen and the Nikkei 225, one can understand what this strategy will lead to. The support of the stock market by the regulator will strengthen the positions of the USD/JPY bulls.
Dynamics of the USD/JPY and Nikkei 225
Source: Trading Economics.
The absence of any hints at the normalization of monetary policy, the expansion of the targeted range of changes in bond yields and the potential transition to a managed point strategy in the purchase of specialized exchange-traded funds indicate that the Bank of Japan's predilection for the cheap money policy continues.
Alas, but still Haruhiko Kuroda's promise to return inflation to a 2% target can not come to fruition. The BoJ is beating like a fish on ice, but no matter how unconventional the approaches to monetary expansion, consumer prices do not want to move up at the right speed. In July, the overall inflation rate rose by 0.9%, the base rate increased by 0.8% y / y. Both indicators did not reach Bloomberg's forecasts of 1% and 0.9%.
Thus, the divergence in monetary policy of the Fed and the Bank of Japan continues to play on the side of the USD/JPY bulls. In order to bring the federal funds rate to neutral level, the Federal Reserve should raise it 2-4 times by 25 bp. The growth potential is not so great, but it is there. At the same time, the dollar takes the yen's status as a safe haven during the escalation of trade wars. If it were not for the return of carry traders to funding currencies in the face of increasing risks of capital flight from the markets of developing countries, the positions of the bears in the pair would look very weak. Meanwhile, any information about newly imposed sanctions, about panic in the EM currency markets makes sellers of the USD/JPY wake up. This circumstance allows me to suggest that my forecast on the medium-term consolidation of the pair in the range of 109-113.5 is still in force.
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Price chart of USDJPY in real time mode
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