The Bank of Japan remains on course to keep its interest rates low for the foreseeable future. At their last meeting, monetary policy was kept unchanged and although emergency pandemic relief was scaled back they did also vote to extend some of the pandemic relief loan scheme to March for smaller firms. COVID-19 risks to the economy are still recognised and the BoJ are likely to keep their dovish outlook in place for the foreseeable future with rates at -0.10%.

The Reserve Bank of New Zealand by contrast has the highest cash rate among major central banks and look set to increase rates further. The RBNZ see the official cash rate at 2.60% by the end of 2023. This creates a large yield differential between the RBNZ and the BoJ. However, there are risks to this outlook.

Risk tone

The main risk is that of a changing risk tone on COVID-19 risk. This is most likely to come from China. China has a Covid-zero policy which looks very hard to maintain in light of the high transmission rate of the Omicron variant. However, if China tries to keep transmission to zero that will likely mean significant lockdowns and potentially more disruptions to the global supply chain. This will hit the risk tone and result in JPY strength. Remember that monetary policy rarely moves the JPY and it is mainly risk moves that see gains or fall in the JPY.