Credit Agricole on the BOJ bending the curve

From Credit Agricole:

We expect the BoJ to announce policies to re-steepen the JGB curve and thus push long-term yields higher still.

---Despite the BoJ's 'comprehensive assessment' of monetary policy, a recent Bloomberg survey showed only 53% of economists expect the BoJ to announce further easing measures at the September meeting (in some form or another). This expectation is distinctly lower than the 78% of economists that were expecting further easing at the July meeting this summer. But to call for a "comprehensive assessment" of monetary policy and then do nothing would be counterintuitive, and it would certainly erode the credibility of the BoJ in our view. It could also look dangerously like the BoJ is 'waving the white flag' on trying to reach its inflation target. So we think that it is unlikely that the BoJ will do nothing next week.

But will the BoJ do something that is positive for the Nikkei and the USD/JPY? Market expectations around next week's BoJ meeting have struggled to find a consensus post the Governor's, Haruhiko Kuroda, announcement of the Boards 'comprehensive assessment' following its July meeting. More recently, however, rhetoric from Governor Kuroda and his Deputy Governor, Hiroshi Nakaso, along with press articles have guided investors' expectations toward the BoJ cutting the policy rate further into negative territory and undertaking some changes to its asset purchases in order to steepen the JGB curve. The term 'reverse operation twist' has been bandied about by the market in the past week. More NIRP would lower the 2Y JGB rate and help push the USD/JPY higher. But as with the January move to NIRP, more NIRP could also impact negatively on the Nikkei and drag the USD/JPY lower.

Ultimately, we think that an attempt by the BoJ to steepen the JGB curve, via a reverse operation twist, would compensate banks for NIRP and be positive for the Nikkei, and also help push the 2Y JGB yields lower. Both would be positive for the USD/JPY.

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