USDJPY remained largely range-bound around the post-BoJ lows of 101-102 in a quiet summer week with a Japanese public holiday last Thursday. Although the BoJ disappointment against some excessive easing expectations is weighing on USDJPY, the BoJ did double up its annual ETF purchases to JPY6trn from JPY3.3trn. This is likely supporting Nikkei and USDJPY, given their correlations; furthermore, expectations of further easing at September's BoJ meeting will likely persist as the BoJ conducts comprehensive reviews.

A notable move this week was in 3m USDJPY basis, which has now completely reversed the post-BoJ tightening. However, as we noted in No breakthrough from BoJ, 29 July, the BoJ's USD Funds-Supplying Operations under central bank FX swap lines are an emergency liquidity backstop rather than a pool of USD liquidity for Japanese investors to tap to fund foreign bond investments. Indeed, the outstanding balance of the CB swap line as of 10 August declined to zero from a very small positive in previous weeks.

We believe solid portfolio rebalancing outflows and upcoming MMF reform will likely to continue to exert widening pressure on short-end USDJPY basis.

Target: USD/JPY at 92 by end of Q3 and at 87 by end of the year".

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