The Bank of Japan’s Monetary Policy Meeting this week is set to reaffirm its dovish stance to the detriment of the JPY. We expect the currency to fall into a weaker 130-135 range against the USD.
Source: Bank of Singapore, Bloomberg.
First, the BoJ remains keen to hit its 2% inflation target by keeping monetary conditions loose. We thus see the BoJ leaving its deposit rate at -0.10% and its 10Y Japanese Government Bond (JGB) yield target ‘around 0%’ as it has since 2016 as the first chart shows. The BoJ may only just tweak its forward guidance - ‘as for the policy rates, the Bank expects short- and long-term interest rates to remain at their present or lower levels’ - to remove its bias to cut interest rates further now that Japan is experiencing inflation rather than deflation as the second chart shows.
Source: Bank of Singapore, Bloomberg.
Second, officials are set to revise core inflation forecasts sharply up from 1.1% for financial year 2022 to closer to 2.0% given the oil shock, JPY weakness, and the base effect from last year’s mobile phone fee cuts receding. But without stronger wages, officials will stress consumer price rises led by costlier energy imports will only be transitory and thus not require the BoJ to raise interest rates yet.
Source: Bank of Singapore, Bloomberg.
Last, Governor Kuroda may moderate his tone around currency weakness benefiting growth since the JPY is now at 20-year lows. But he is unlikely to signal the authorities will intervene yet in the currency markets to support the JPY - as occurred between 130-140 in 1998 as the last chart shows - as hitting 2% inflation remains Kuroda’s priority before he retires next year.
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