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"This week's 'comprehensive assessment' from the BoJ could be one of two things.
On the one hand, it could be a fundamental reassessment of the policy stance, presumably with a view to adding stimulus. Given that the BoJ is missing its inflation forecast by a mile, this is certainly a reasonable expectation.
On the other hand, it could essentially be a PR exercise, selling the benefits of negative rates after the public backlash from the financial sector following the January IOER cut. This would see policy largely unchanged, with a view to building consensus around existing policies and setting the stage, perhaps, for further rate cuts down the road.
We outlines our expectations for the upcoming policy meeting. We are not optimistic. Similar to the ECB, focus at the BoJ has shifted toward making the existing policy stance sustainable, as opposed to adding stimulus to meet the inflation target. A particular risk - not our base case - is that the BoJ could take steps to bear steepen the yield curve, to help the financial sector following the dramatic curve flattening since January. In our view, such a step could further compound market confusion over BoJ objectives and exacerbate the damage done to longer-term inflation expectations year-to-date.
We are lowering our $/JPY forecast to 108, 110 and 115 in 3-, 6- and 12-months (from 115, 120 and 125 previously). Our 3-month target of 108 reflects our view that the BoJ will continue to ease at upcoming meetings, likely via further IOER cuts. The reduction in the 12-month forecast reflects our view that such easing is not enough to reverse the adverse dynamic that has taken hold since January. For that to be the case, more radical steps such as yield caps or price level targeting are needed, which we believe are not on the BoJ's radar screen at the present time".
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