Credit Agricole asks if Bank of Japan will announce a taper

"Despite JPY strengthening in the new year, our positioning indicator suggests the market's short JPY position remains at multi-year extremes.

While first-tier data on the labour market and industrial output will attract some attention from the JPY next week, the main local focus will be the BoJ meeting and the Board's Outlook Report.

Over the past year, the JPY TWI has strengthened in the week of all but one of the BoJ meetings. Admittedly, BoJ meetings have usually occurred the same week as FOMC meetings, and a stubbornly dovish FOMC has contributed to JPY strength during those weeks.

While the FOMC also meets next week, its members have been sounding more hawkish and so could contribute to a breaking of this pattern. But we also see a risk of a more upbeat BoJ in its first Outlook Report for the year. Indeed, the weaker JPY in Q4 will lead to stronger inflation and, to some extent, cyclical data readings in the coming months. And JPY depreciation has already helped push medium-term inflation expectations higher. BoJ Governor Haruhiko Kuroda recently said that Japan's economy has improved a lot and that it will grow well above expectations.

There is also some risk of the BoJ scrapping its guidance as when it comes to bond purchases. The central bank may have stepped up purchases in bonds due in 5-10 years, but the increase is not fully offsetting the reduction in shorter-term purchases. Our economists note that the net increment in JGB holding in 2017 will be way below the present guidance of JPY80trn.

As such, a formal taper announcement cannot be excluded. Any announcement of a formal taper would likely contain some sticker shock and strengthen the JPY, as it would lose some of its appeal as a funding currency.

We still significant risk of further downside in JPY crosses".

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