Forex Flash: Changes abound for the BoJ – Goldman Sachs

FXstreet.com (Barcelona) - Last week’s Bank of Japan meeting saw it embrace –and arguably exceed –QE, Fed-style. The market has taken note. Japanese yields have plummeted, Japanese stocks have rallied and the Yen has weakened. However, “we doubt that the full ramifications of the BoJ’s shift have been felt. We still see scope for the Yen to weaken and for Japanese stocks to rise, even with legitimate uncertainty that the inflation target can be reached quickly.” notes the Economics Research Team at Goldman Sachs.

Our framework for looking at ‘liquidity trap’ exit suggests that the market has not yet fully reflected the recent policy shift in its expectations of longer-dated inflation. “The notion that FX and equity markets can continue to move even after the announcement of a large policy shift would be consistent with the evidence from US and UK unconventional easing. If US yields rise again, as we expect, that could provide further fuel.” they add.