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Japanese Yen Correction to Be Limited- BoJ Rhetoric in Focus

Japanese Yen Correction to Be Limited- BoJ Rhetoric in Focus

David Song, Strategist
Japanese_Yen_Correction_to_Be_Limited-_BoJ_Rhetoric_in_Focus_body_JPY.jpg, Japanese Yen Correction to Be Limited- BoJ Rhetoric in Focus

Japanese Yen Correction to Be Limited- BoJ Rhetoric in Focus

Fundamental Forecast for Japanese Yen: Neutral

The Japanese Yen bounced back against its U.S. counterpart, with the USDJPY tagging a weekly low of 100.82, and the near-term pullback may turn into a larger correction as the Bank of Japan (BoJ) appears to scaling back its aggressive approach in achieving the 2% target for inflation. At the same time, Economy Minister Akira Amari warned that a further depreciation in the local currency can ‘negatively’ affect Japanese households, and went onto say that the ‘excessive Yen gains have been corrected a lot’ as the exchange rate trades above the 103.00 figure for the first time since 2008.

Indeed, the BoJ Minutes struck a rather neutral tone for monetary as the board pledged to adjust monetary policy as need, and it seems as though Governor Haruhiko Kuroda will carry a wait-and-see approach into the second-half of the year as the central bank head looks to avoid ‘excessive volatility’ in the debt market. As the BoJ raises its fundamental assessment of the Japanese economy for the fifth consecutive month, the central bank anticipates price growth to ‘gradually turn positive’ over the policy horizon, and the board may retain its current policy stance at the June 11 meeting as Mr. Kuroda argues that the central bank has announced sufficient monetary easing to stem the risk for deflation. As we have a slew of Japanese policy makers scheduled to speak in the week ahead, we may see a growing number of central bank officials curb their willingness to introduce more non-standard measures, and the Consumer Price report on tap for the following week may continue to dampen speculation for additional monetary support as the headline reading for inflation is expected to contract at a slower pace in April. However, the BoJ may have little choice but to further embark on its easing cycle in the second-half of the year as there remains a ‘high degree of uncertainty’ surrounding the world’s third-largest economy, and we may see the central bank included a broader range of asset classes in its quantitative easing program in an effort to encourage a stronger recovery.

As the Relative Strength Index on the USDJPY continues to come off of overbought territory, the pullback from 103.72 may gather pace in the days ahead, but former resistance around the 100.00 handle may serve as interim support amid the deviation in the policy outlook. In turn, we may see the dollar-yen carve out a higher low ahead of June, but correction may evolve into a large reversal should we see the BoJ strike a less-dovish tone for monetary policy. DS

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