BOJ raises inflation expectations yet preserves the yield curve. On Friday, it reiterated its ultra-dovish position and pledged to maintain yield curve control
BoJ warns of growing salaries and a decline in the impact of government assistance. Yen Benefits
The Bank of Japan maintained its key interest rate at -0.1%. While indicating it’s likely to will keep its fiscal easing and yield curve management policies in place for the moment.
To examine the implications of a protracted flexible policy on the Japanese economy. The central bank also said that it will conduct a broad-outlook assessment of fiscal policy during the next eighteen months.
The inaugural monetary policy meeting under newcomer Governor Kazuo Ueda, just three weeks ago, will take place on Friday. Ueda has previously indicated that the country’s monetary policy is anticipated to stay greatly unaltered in the near future.
In a statement issued on Friday, the BOJ restated this position, saying that due to “high uncertainty” regarding the Japanese economy. The bank will “patiently persist with monetary loosening” till it reaches its 2% inflation objective.
The Yen dropped after BoJ’s remarks
Given that the BOJ’s announcement offers a dovish stance on monetary policy. Ruling out the prospect of the bank ending its yield curve management measures later this year. The Japanese yen dropped sharply after it.
However, the BOJ significantly increased its prediction for consumer price index inflation for fiscal 2023. And now expects inflation to trend around 2.5%, up from a Jan projection of 1.5% to 2%. In the next fiscal years 2024 and 2025, inflation is predicted to trend between 1.5% and 2 percent.
The bank anticipates that the conclusion of 2023 will see an increase in inflation due to a favorable production gap. Aided by tighter labor market conditions, and the waning effects of government subsidies on energy.
BOJ continues to forecast CPI inflation to decline by mid-2023.
Data issued this past week revealed that countrywide core inflation stayed persistent at 3.1%. Significantly over the BOJ’s annual target of 2%. Despite this fact, the BOJ continues to forecast CPI inflation to decline by mid-2023.
Inflation in Tokyo, the capital of Japan, increased more than anticipated in April. Returning to the highs of 40 years observed earlier this year, according to data revealed earlier on Friday. The statistic, which often predicts an identical rise in overall inflation, may put pressure on the BOJ to tighten monetary policy sooner.
The prospect of changing the BOJ’s yield curve control strategy later in the year. Especially if salaries and inflation increase much more, was also mentioned by Governor Ueda. However, the bank’s forecast is essentially dovish according to Friday’s announcement.
Yen’s Reaction and Outlook
One-week USDJPY risk shifts appeared to be substantially biased in favor of JPY. Indicating that the options market was set up for aggressive results. Given that the BOJ is not unfamiliar with giving surprises. The YCC band’s upper limit was unexpectedly increased by the central bank in Dec and in Jan. When some anticipated it to be further broadened, the bank decided to hold still.
When zoomed in on shorter timescales, USDJPY seems to be controlled by crossing flux; The pair has displayed a little upward bias since the end of March. Which is indicated by the upward-sloping channel on the 240-minute chart. It recently retreated inside a declining channel that began in mid-April.
One Week 25-Delta Risk Reversal Patterns for USDJPY
Source( Data): Bloomberg
The path of least resistance may remain sideways until the duo breaches a horizontal trendline from March. Which is at roughly 135.00 on the upside or the mid-April low of 132.00 on the negative side. Any significant breach under 132.00 might expose the dangers of nearing the Jan bottom of 127.20. While a breach over 135.00 could pave the door toward the March top of 138.00.
