Fed rate hike expectations likely to outweigh on BoJ’s policy outlook in near-term

Fed rate hike expectations and the USD’s movements will likely continue to outweigh the BoJ’s policy outlook to drive market developments in the near term.

The dollar’s broad-based rally, as a result of high expectations for pro-growth policies under the new US president, has sent the yen to the weakest level over five months. The 10Y JGB yield has also felt the spillover effects from rising UST yields, creeping upward to approach the BoJ’s target level of 0 percent.

The economy grew 2.2 percent q/q on a seasonally adjusted annual rate basis in 3Q16, beating the consensus forecast of 0.8 percent and above- consensus estimate of 1.3 percent. Higher growth was primarily contributed by external demand. Exports of goods and services grew 8.1 percent in 3Q16. Net exports, therefore, added 1.7ppt to the headline growth last quarter, DBS reported.

Domestic demand remained sluggish and disappointing on the other hand. Private consumption expenditures increased marginally by just 0.2 percent, while private non-residential investment was also nearly stagnant at 0.1 percent.

However, the outlook ahead still highly depends on external factors. The exports-driven recovery is likely to be sustained in 4Q16, thanks to the stabilization in the Chinese economy and the cyclical upturn in US electronics demand. Meanwhile, uncertainties remain high in the medium-term, given that the risk of China’s slowdown still lingers and that of US trade protectionism is on the rise.