The BOJ’s July monetary policy announcement, due late next week, looks set to set markets on a wild ride.
Traders and investors have been positioning for further stimulus in recent weeks, unperturbed by recent policy announcements from the BOJ that have underwhelmed lofty market expectations. Stocks have soared, Japanese government bond yields have fallen even deeper into negative territory, while the yen has weakened – all the trademarks of markets expecting action.
For anyone who’s been watching financial markets in the post-GFC, stimulus-inspired world, it appears that further policy stimulus from the BOJ is as close to a certainty as one can get. It’s baked in the cake, fully priced in.
The only question now, seemingly, is what actually will be delivered? Will it be further interest rates cuts, more quantitative and qualitative easing (QQE) or, as has been speculated upon heavily since former US Federal Reserve chair, Ben Bernanke, met with the BOJ earlier this month, the introduction of “helicopter money”.
According to a recent survey of North American, European and non-Japanese Asian investors conducted by Citibank’s FX team, led by Steven Englander, almost everyone expects the BOJ to add to stimulus within the next two months.
“Our survey on a July BOJ move produced such striking results that we decided to report early, after about 170 responses,” says Citi, noting that around 35% of responses came from hedge fund clients with the remainder from corporates, real money and internal staff within the bank.
Based on the results received so far, Citi suggests that the risks heading into the BOJ decision are, yet again, skewed towards market disappointment.
“Nearly 70% of respondents personally expect the BOJ to ease in July with 30% expecting a first move in September or later,” says Citi.
“In contrast, when asked what they thought market expectations were for the BOJ in July, 94% of participants expected some form of easing. This was one of the biggest discrepancies in the survey. If investors trade their personal views against their perception of the market view, it means that an ease is less of surprise and a disappointment is an even bigger surprise than most investors think.”
So not only do most expect that further stimulus is coming – their perceptions of what others are thinking is even higher, at 94%.
Potential for disappointment
While there are obvious exceptions to the rule, particularly should the BOJ introduce “helicopter money” rather than expanding upon existing policy measures, the results, along with recent price action in Japanese markets, suggests there’s plenty room for investor disappointment, as seen in prior BOJ announcements.
That point is touched upon by Citi in relation to the Japanese yen.
“People are confident that no move from the BOJ, despite forward guidance, will be negative for USD/JPY, but they leave room for the BOJ to put off a move till September if they give concrete forward guidance,” it says.
“On no move and no guidance, 80% of responses say USD/JPY will fall more than 3%, more than 30% think the drop will be more than 4%. On no move but concrete guidance for September, 34% saw a 1-2% USD/JPY drop, and 15% saw a 2%+ drop. BoJ Governor Kuroda has enough credibility for 30% to think USD/JPY would rise by 1%+, while 20% saw changes less than +/-1%.”
Given all the chatter about unconventional monetary policy being implemented at this meeting, one suspects that downside risks for the yen, and as a consequence Japanese stocks given the relationship between the two, could be even greater heading into the event.
Markets have now moved beyond QQE and negative interest rates. To many, they simply haven’t worked in boosting inflationary pressures or economic growth.
As shown in the far left of the chart below, supplied by Citi, a large and growing percentage of investors believe that the BOJ will try something far more aggressive and inventive in an attempt to kick start the economy.
This has lowered the bar substantially for disappointment, regardless if the BOJ leaves policy on hold, signals further easing or delivers more asset purchases or another cut in interest rates.
We’ll find just how big that risk is in just over a week’s time.