Photographer: Tomohiro Ohsumi/Bloomberg

Yen Is at Risk of Big Move, Like Euro in June, Evercore ISI Says

  • ‘Very good reason’ to worry about early BOJ move: Evercore ISI
  • BOJ policy still most likely on hold in ’18, Evercore ISI Says

The second quarter of 2018 is shaping up to be a potentially sensitive time for the yen, when new -- or newly reappointed -- leaders at the Bank of Japan could opt to telegraph a tweak in monetary policy, according to Evercore ISI analysts.

Focus on a potential boost to the BOJ’s yield-curve target -- even with Japan well short of its 2 percent inflation goal -- has increased since Governor Haruhiko Kuroda mentioned the theory of too-low rates undermining monetary stimulus. While Kuroda emphasized Japan’s banks are coping well with very low yields now, the comments, echoed by Deputy Governor Hiroshi Nakaso last week, spurred some to think this is a basis for a future policy tweak.

"We are on amber alert as we look out to Q2 next year, when year-end financial disclosures from the banks and a new term for Kuroda or his successor as BOJ governor present a natural moment to reassess" current policy, Evercore ISI analysts Krishna Guha and Ernie Tedeschi wrote in a note Sunday. Their baseline call remains for the current policy settings to remain unchanged through 2018.

Even just the signal of a policy shift could generate a significant currency move, as European Central Bank President Mario Draghi saw in June, when the euro surged after traders interpreted what was intended as a balanced speech as a shift to hawkishness.

"An early hike would be a dangerous play for the BOJ because it could trigger an outsized move in the yen comparable to the surge in the euro following Draghi’s Sintra speech," the Evercore ISI analysts said. "Any steepening of the yield curve in Japan would likely put some steepening pressure on global yield curves including in the U.S.," they said.

Kuroda and Nakaso last year also memorably flagged the risk of excessively low yields. They both noted the potential for damage to confidence in the financial sector, days before a policy shift that has kept 10-year yields around zero percent after they slid to negative 0.3 percent in mid-2016.

This time, the signal from the governor "could garner support from the financial sector for Kuroda’s reappointment" in April, Guha and Tedeschi wrote. "Kuroda may also simply want flexibility to reassess the optimal yield curve if reappointed to a second term."

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