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Citi's BOJ outlook - expect more easing in January, yen to weaken further

Citi Japan economists expect the Bank of Japan to add further monetary easing at the January meeting

  • The BOJ meet next week (December 17 and 18), the January meeting is on the 28th and 29th

Citi cite their reasoning (my summary):

  • BoJ to implement further easing given the current stagnant state of the Japanese economy and inflation
  • The government will enact the supplementary budget immediately after the regular Diet session starts on Jan 4
  • We believe the Jan 28/29 meeting of the Monetary Policy Board will be the best timing for the BoJ to take an action. This would be the last chance for the bank to influence wage negotiations held between Feb and Mar.

What Citi expect from the BOJ:

  • Additional easing to consist of a JPY 1tn per month increase in JGB purchases and a JPY 2tn per year increase in ETF investments

On the yen:

  • Leading politicians like Prime Minister Abe or Chief Cabinet Secretary Suga are now distancing themselves from JPY depreciation, as it is associated with real wage losses from imported inflation
  • A rise in USDJPY much beyond 125 before next July's Upper House election would even become a political problem
  • If USDJPY goes well beyond 125 before the Jan 28/29 meeting, the BoJ may choose ETF purchases only
  • We don't yet anticipate USD selling by the MoF
  • The GPIF could start to hedge its FX exposure, as could other public pension funds and the Japan Post Bank that also greatly increased foreign investments in recent years. An increase in the FX hedging ratio would be welcome by the government authorities if it capped JPY weakness.


  • Our fundamental mode estimates USDJPY fair value at around 112
  • Based on the model, the present asset purchases of JPY 80tn each year by the BoJ is calculated to depreciate the Japanese currency by some 4 big figures against USD annually
  • Policy divergence between Japan and the US will push up the USDJPY equilibrium over time, but the JPY Undervaluation could limit rapid depreciation of the Yen
  • Many real money investors are reluctant to see a currency that is now so fundamentally undervalued. We expect USDJPY likely to peak around 127-128 after the BoJ's next action, supposed in January, and then be pulled back toward 120 as the markets finish to price in the positive factors for the US dollar in H2 2016 as we suppose.


I have to say my eyes nearly popped out my head when I read Citi report they were expecting a January easing. I'm not, at all.

  • Data from Japan has turned better ... its not great, but tis moving in a better direction
  • Inflation is edging higher
  • Kuroda, and BOJ board members, are giving very little indication they want to ease further at this stage

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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