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"The BOJ's new policy framework aims to improve the sustainability of its easing, as the Bank acknowledges the battle to reach the price target may be more prolonged. The transformation was inevitable sooner rather than later, and the BOJ made the initial step relatively smoothly, avoiding volatility in bond and equity markets. At the same time, the decision does not necessarily add much fresh stimulus to the economy, and we judge this preparation for a prolonged fight means less frequent policy reactions going forward. Thus, we expect the immediate impact on JPY to be limited.
Nonetheless, the improved sustainability under the new policy framework will enable JPY weakness in the medium term, as 1) it avoids the danger of deterioration in risk sentiment by sudden tapering, 2) the policy rate cut will be less harmful for the financial sector, and 3) expectations for joint efforts by the BOJ and the government will continue.
As a result, when positive external developments, such as US rate hikes and a reduction in US political uncertainty, occur, Japanese investment in foreign assets with no FX hedging could accelerate more easily. Carry trade-type JPY selling should also become gradually easier. The BOJ's commitment to maintaining stability in the JGB market will be the key to success".
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