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"Yesterday's BoJ decision contained many changes to their framework but has not materially changed the near-term outlook.The BoJ's yield curve targeting still keeps NIRP in place as well as low long term interest rates, just by a different mechanism than before. The new framework does help the BoJ's dilemma by giving them more flexibility around QE purchases and the yield curve and the new commitment to inflation overshoot reinforces the BoJ's commitment to weaker policy but they don't have near term weakening implications on JPY. For that reason, in addition to our bearish USD view, we think USDJPY can trade lower for now towards our target of 97.
We have been bullish on the JPY for the past year and are now looking for a bottom in this pair, expected between 97 and 100, before it heads back up to 107 in 2017.
We think changing inflation expectations would drive a weaker JPY. There are three ways Japan could see higher inflation. First,domestically generated,via the success of Abenomics feeding through into economic data and stronger wages. Second,internationally generated,via higher commodity prices or an improved growth and trade outlook. Third would be an expansion of government spending, the measure that could speed up the rise of inflation expectations. If this spending is debt funded and causes a steeper yield curve together with higher inflation expectations, then this would cause the quickest JPY weakness and be the most bearish scenario. Our base case assumes a slow rise of USDJPY over the coming quarters".
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