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BoJ Faces Fading Confidence in Stimulus, Skeptical Yen Trader

BoJ Faces Fading Confidence in Stimulus, Skeptical Yen Trader

2016-09-20 04:10:00
John Kicklighter, Chief Strategist
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Talking Points:

  • The BoJ will be the first of three major central banks to deliberate monetary policy Wednesday
  • Neither market nor economist shows anticipation of more easing from the Japanese central bank
  • There is a clear skew in the potential market impact this event offers as skepticism over easing soars

See how retail traders are positioning in the majors using the DailyFX SSI readings on the sentiment page.

While global investors will direct much of their attention this week on the Fed rate decision, the Bank of Japan's (BoJ) deliberations are just as important. Where the FOMC's ruling on whether to hike in September or 2016 shapes the 'hawkish' end of the global spectrum, the Japanese authority will strike a raw nerve as an evaluation on the failing influence of increasingly extreme accommodation - the 'dovish' end of the scale. Given the state of the global financial markets where the reach for return has grown extreme and dependent on an effective/expansive central bank network, the scope of influence from this event is dangerously wide.

For particulars in the event, the announcement is due sometimes late-morning or mid-day Wednesday in Tokyo. The central bank does not set a specific time for release, but it is usually released between 2 and 4 GMT. BoJ Governor Kuroda's press conference is scheduled for 6:30 GMT specifically however. Heading into this event, neither economists nor markets seem to expect fresh accommodation - or at least effective upgrades. A unique factor to this meeting is an assessment of previous efforts adopted. This offers little opportunity to strengthen credibility and may be just a plant for justifying more - though that will face the same skepticism that has built up over the previous 8-16 months on dovish winds.

From an FX response, we find many Yen crosses have worked their way into a pattern that makes a technical break easier to accomplish. From a scenario analysis of previous market reactions, it is difficult to craft a scenario where the resolution to this consolidation in bullish Yen crosses / bearish Yen - which is generally what would be deemed a vote of effectiveness. It is not impossible however - extreme escalation is possible. Skepticism reins so the risks of volatility is clearly greatest for a USD/JPY breakdown. Yet, be wary of the risk implied in the high-profile Fed rate decision due later. We focus on the BoJ rate decision and its impact in today's Strategy Video.

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