The JPY is at risk of falling into a weaker 130-135 range against the USD now after today’s very dovish Bank of Japan Monetary Policy Meeting.
Source: Bank of Singapore, Bloomberg.
First, the BoJ kept all its monetary policy settings unchanged to help push inflation higher towards its 2% target, despite the weakness of the JPY and the receding risks of deflation in Japan.
The central bank left its deposit rate at -0.10%. It also maintained its 10Y Japanese Government Bond (JGB) yield target ‘around 0%’ as it has since 2016 as the first chart shows. Moreover, the BoJ even kept its forward guidance with its bias to ease further ‘it also expects short- and long-term policy interest rates to remain at their present or lower levels.’
Source: Bank of Singapore, Bloomberg.
Second, the central bank doubled down on its commitment to keep JGB yields very low - at a time when global yields are surging because of inflation fears - by offering to buy unlimited amounts of bonds every day.
Last, the BoJ revised its core inflation forecasts up for the current financial year 2022-23 from 1.1% to 1.9% - unsurprising given the shock to oil prices from the war in Ukraine, the weakness of the JPY and the impact of last year’s mobile phone fee cuts receding - but still projected core inflation to decline back to 1.1% in the next financial year.
Thus, the BoJ expects recent rises in core inflation towards 1.0% - shown in the second chart - to continue this year but still only be transitory in the absence of stronger wages and higher inflation expectations in Japan. Therefore, the forecasts signal the BoJ does not expect to tighten monetary policy for the foreseeable future given inflation is still projected to undershoot its 2% goal.
The BoJ’s stance remains very dovish when the Federal Reserve and other major central banks are raising interest rates quickly. We expect the BoJ will not make any significant changes until Governor Kuroda retires in April 2023. Since setting a 2% inflation target at the start of his tenure in 2013, the BoJ has consistently missed its goal. But now Kuroda has a last chance to set Japan on the path of stable 2% inflation. The BoJ’s stance is thus likely to push the JPY to new 20 year lows between 130-135 against the USD.
Banner image source: AFP
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