Forex Flash: BoJ decision first of series of interventions? – UBS

FXstreet.com (Barcelona) - According to Research Analyst Gareth Bery at UBS, “The BoJ decision today will likely mark the first of a series of ‘interventions’, which could have far-reaching implications for the behavior of Japanese investors onshore. We have extensively discussed the potential for more flows overseas, and one of the most important roles for decision-makers in Japan in the coming months will be to encourage Investment Trusts, Life Insurers and other asset managers to 'get moving'.”

On a monetary level, it has been well observed that private-sector liquidity preference in the yen by domestic investors has been far too high. This has offset any 'tame' attempts at 'debasement' via the BoJ's activities throughout the years, and this is the key psychological adjustment that more forceful policy is designed to counter. “Nonetheless, domestic liquidity preference for the JPY likely reached a critical mass long ago, suggesting that there have been alternative drivers of JPY strength, beyond the reach of the BoJ.” Berry notes.

In the context of general investor anxiety over keeping euro-denominated assets post-Cyprus, we believe that offshore liquidity preference for the JPY has been the marginal source of demand for the currency, and data suggests that Central Banks have been the most active in this space. The amounts may have been limited, but in an (zero-bound) environment where marginal activity has an outsized impact, this is the flow that the BoJ's yen debasement must also serve to deter.