TOKYO (AFX-ASIA) - Nikko Salomon Smith Barney said it expects the yen to ease after the Bank of Japan's belated interest rate cut -- seen as a precursor to a return to zero-rates -- and with the economy continuing to slide.
The brokerage's Japanese economic team said in a note that the market reaction will unlikely be positive enough to justify maintaining the interest rate target even at its new lower level.
"Given the accelerating slowdown in the economy, we doubt that markets will react positively enough to justify the Bank of Japan staying put at current rates," the note said.
"We stick with our main view that the Bank of Japan will reduce rates further, effectively to zero, within the next months, and consider other measures such as quantitative targets," it said. "Bond yields should trade at or below our main forecasts; 1.3 pct on the one and three month horizons.
"Furthermore, with the economy sliding and the BoJ belatedly easing policy, the yen remains likely to depreciate notably, toward the 125-128 yen level (against the dollar) by the summer."
The brokerage noted "mildly encouraging" language in the bank's statement today.
"The BoJ now acknowledges that 'renewed concerns that downward pressure on prices stemming from weak demand might intensify'," it said.
"Last summer, the BoJ's deletion of this language foreshadowed the end of (zero-rates), so the fact that it has returned is significant," the note said.
"The Bank has implied that further measures may be in store," with its comments that it will continue to conduct monetary policy in a timely and flexible manner to restore autonomous growth.