Japanese Yen, Bank of Japan, USD/JPY, Monetary Policy – Talking Points
- Japanese Yen Swings Against US Dollar Following Bank of Japan Decision
- BoJ maintains policy rate and yield curve control amid tepid inflation
- USD/JPY stabilizes after initial move as trades look for direction
The Bank of Japan maintains its ultra-accommodative monetary policy
The Japanese yen was little changed against the US dollar after the Bank of Japan (BoJ) maintained its ultra-loose monetary policy framework, maintaining its 0.25% yield cap on Japanese government bonds ( JGB) at 10 years. and the policy rate of -0.1% in place, counter to a global trend towards monetary tightening. USD/JPY was little changed after an initial bearish reaction. Improved inflation forecasts may explain the lack of yen weakness here.
The BoJ raised its inflation forecast to 2.3% from 1.9% in April. Core inflation rose 2.1% in May from a year ago, slightly above the central bank’s 2% target. The forecast core CPI for next year excluding energy rose from 1.1% to 1.4%. However, prices are expected to remain below target as supply chains normalize. Updated forecasts call for non-energy core prices to decline to 1.3% by 2024, up slightly from 1.1% but still well below target.
The central bank cut the growth forecast for the current fiscal year to 2.4% from 2.9%, highlighting the impact of Covid lockdowns in China, the war in Ukraine and rising rates in the ‘foreign. Japanese consumers have seen wages fall in real terms as prices outpace nominal wage growth. Government data for May, released earlier this month, showed the biggest drop in real wages in nearly two years.
Governor Haruhiko Kuroda, whose term is due to expire next April, has been adamant in his defense of the bank’s ultra-loose policies despite the yen falling to its lowest level in 24 years. This weakness has increased already high import costs. Earlier in the day, Japan posted a trade deficit of 1.38 trillion yen for June. On a seasonally adjusted basis, it was the highest since 2014. Japan’s trade portfolio is likely to remain in deficit as the global economy cools, tempering demand for Japanese goods and maintaining pressure on the JPY.
In April, in a rare move, the policy statement added exchange rates as a risk to the economy. Some took this as a sign of anxiety and saw further yen depreciation potentially forcing policy intervention. This inspired short bets against JGBs, a trade known as widowmaker. The BoJ was forced to buy an unusually large amount of bonds to defend its yield cap. On the currency front, short bets on USD/JPY also increased as traders favor tail risk odds for the yen to rally after today’s news. Those bets have eased in today’s announcement.
USD/JPY 1 minute chart
Chart created with TradingView
— Written by Thomas Westwater, Analyst for DailyFX.com
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