The market fear was that the new governor at the BoJ would not be tough enough starting out at his first monetary policy meeting this week. Many had expected him to ease his way into his new role. However, Governor Kuroda has a different agenda – he is not holding back and has come out of the Central Bank gates swinging.
Kuroda is kicking off his inaugural two-year term with an aggressive new easing program designed to combat more than 15-years of deflation in the world’s third-largest economy. The key measures of the BoJ’s “Quantitative and Qualitative Monetary Easing” program include a doubling of bond purchases to 7-trillion yen (US$75b) a month and an expansion of purchases of other assets, including exchange traded funds and real estate investment trusts. The central bank will end up buying more that +70% of newly issued debt – thereby removing a lot of supply from the market.
The pledge of aggressive buying has caused Japanese Government Bonds [JGB] to rally violently and flatten their yield curve. The market consensus believes that the aggressive shift in BoJ policy is likely to significantly affect the “traditional dollar dynamics.” With this in mind, the current downside risk in USD/JPY is likely to be very limited, as the Japanese domestic investors will likely view any data-driven dollar dip as an excuse to add to market long positions.
The fact that USD/JPY is holding its own after a much weaker payroll print speaks volumes for a determined new BoJ. The market's magic number for USD/JPY seems to be 100 and this market is determined to get there in a hurry.