EUR/JPY: Case for a near-term rally has weakened - Danske

Analysts from Danske Bank still expect the Bank of Japan to cut rates in July and expect the Japanese government to announce a fiscal stimulus package during the second half of 2016. They target EUR/JPY at 120 in 1-month, 123 in 3M, 128 in 6M and 132 in 12M.

Key Quotes:

“ Data have in general surprised positively in recent months indicating that the Japanese economy is doing ok in Q2 as well. However, despite positive data surprises, business surveys (PMI and Tankan) indicate further deterioration in the manufacturing sector in coming quarters.”

“The Bank of Japan (BoJ) kept its monetary policy unchanged in June with a quantitative target of Japanese government bonds purchases of JPY80trn annually and the key policy rate at -0.1%. We still expect the BoJ to cut its policy rate by 20bp to - 0.3% in July and to announce additional qualitative measures including a scale up of ETF purchases and a maturity extension of its government purchases.

“In the event of a Brexit (not our main scenario), we expect the BoJ to intervene in the FX markets in order to curb JPY appreciation.”

“In our previous forecast we anticipated a coordinated fiscal and monetary easing package would be announced in late May or in June. So far, the Japanese government has postponed the implementation of the planned VAT hike from April 2017 to September 2019. At the same time, the government announced that a fiscal stimulus package will be announced later this year. This effectively means that the coordinated response that we called for did not materialise and thus the case for a near-term rally in EUR/JPY has weakened.”