Analysts at Nomura Securities International, Inc. (Nomura), explained that the Q2 BOJ tankan showed weaker business sentiment among manufacturers, although sentiment among non-manufactures inched up slightly – Also, noting that The Nikkei newspaper reported that the BOJ is looking to lower its FY2019 inflation forecast.
Key Quotes:
While the level of manufacturing sentiment remains high and CAPEX plans were raised, concerns over trade wars may have had a slightly negative impact on sentiment. The FY2018 USD/JPY assumption was lowered to 107.26 from 109.66, and their view on USD/JPY suggests they see downside risks rather than upside risks
As USD/JPY trades higher than the assumption and they likely sold USD well in April, we feel Japanese exporters are relatively relaxed at the moment and they may not rush to sell USD/JPY
The Nikkei newspaper reported that the BOJ is looking to lower its FY2019 inflation forecast to around 1.5% (unconfirmed). As we have been arguing that the next step for the BOJ is to lower its inflation forecast significantly, this news is unsurprising to us.
20yr JGB yields still declined today, breaking 0.5%. The BOJ may not add fresh stimulus even after it lowers its forecast, but we judge it is now more difficult for the Bank to start its policy normalisation process, even in 2019. As we argued last week, market expectations on the timing of BOJ policy normalisation could change significantly if a policy adjustment is viewed as difficult in Q1 2019.
We would expect such a shift in market expectations, which would likely take place in the next few months, to broadly weaken JPY.
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