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Bank of Japan Holds the Accommodative Line While Inflation Remains Sub-2%

Bank of Japan Holds the Accommodative Line While Inflation Remains Sub-2%

2017-04-01 03:03:00
James Stanley, Currency Strategist
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Bank of Japan Holds the Accommodative Line While Inflation Remains Sub-2%

Fundamental forecast for the Japanese Yen: Neutral

The Japanese Yen has been on somewhat of a rollercoaster ever since Presidential Elections in the United States. After a rather consistent run of weakness against the Greenback in the month and a half after the start of the ‘Trump Bump’, USD/JPY combined sideways price action with a slight bearish bias to continue the retracement-lower that started in the first week of this year. But making matters more interesting is that despite the fact that the run of weakness in the Yen (strength in USD/JPY) lasted only six weeks while the current retracement is now going on 15 weeks, the formation here is still bullish as we haven’t yet retraced more than 50% of that Trump-inspired move-higher, which is right around the key level of ¥110.00.

The reason for the continued bearish stance in the Yen is likely the Bank of Japan…

In January, we asked how confident the BoJ might be in the continuation prospects of the ‘Trump Trade’. Given the saga that had developed at the Bank in the earlier portion of the year, after the surprise movement to negative rates appeared to work out really very badly, it wasn’t likely that the BoJ was going to quickly move-away from their accommodative stance just because of six weeks of Yen weakness. And they weren’t, nor were they ready to move away from that accommodation at their following rate decision in March. This week, we received the Summary of Opinions from that rate decision, and this further echoed the sentiment that the BoJ is not yet ready to move away from their massive bond buying efforts as long as inflation remains subdued below their 2% inflation target.

Taken from that summary was the key line: ‘The Monetary Policy in Japan should be decided based on Japan’s economic activity and prices. It will be a considerable length of time before the Bank will need to change its monetary policy.’

So, there it is: The BoJ is ready to hold the line on monetary accommodation before they become convinced that any changes to policy will be due. Retail sales came out two days later and were disappointing across-the-board. And then later in the week, we got another data point on that topic of prices when February inflation printed at .3% versus the expectation of .2%. Given that this is still well-below the bank’s 2% target and less than the .4% prior print, and also taken with the fact that core CPI printed directly in-line with the .2% expectation - this likely isn’t sending investors racing for the exits just yet.

Next week brings a slate of medium-importance announcements out of Japan: Manufacturing PMI’s are set to be released on Sunday, Services PMI’s are released on Wednesday, and Consumer Confidence on Thursday. Each of these can add drive to JPY given the implication around stronger data bringing stronger inflation which will, eventually, begin to move the BoJ away from dovish accommodation. But more likely as primary drivers next week will be the larger global macro trends that have developed as questions around the ‘Trump Trade’ continue to circulate.

This week opened with a gap-higher in the Yen as risk aversion showed after the failure around AHCA in the House of Representatives. But shortly after the BoJ Summary of Opinions from the March rate decision were released, support developed in USD/JPY just above the key level around ¥110.00 as Yen-weakness began to come back into the fray. If we see a return of risk tolerance next week, as driven by key U.S. releases like ISM manufacturing on Monday, or FOMC meeting minutes on Wednesday, or Non-Farm Payrolls on Friday - Yen weakness could certainly continue, particularly after this most recent pledge towards continued-accommodation from the Bank of Japan and the apparent lack of strength in underlying Japanese economic data.

However, these are some big ‘what ifs’, at this point. The forecast for the Japanese Yen will be held at neutral until more information avails itself around either a resumption in risk tolerance and/or the potential for continued risk aversion.

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