Pressure has increased for the BoJ for its mid-June meeting, but its policy remains unchanged. The Yen weakness has been pronounced this year as the yield differentials between the JGB’s and US treasuries have kept the JPY weak. Furthermore, the weakness in the JPY has been amplified by the rise in oil prices. See here for four things to know when trading the JPY. The weakness in the JPY is difficult for the domestic part of Japan’s economy. This point is recognised by both Governor Kuroda and Japan’s PM Kishida. However, despite this, the BoJ is maintaining an ultra-low monetary policy stance. At the latest meeting, interest rates remain at -0.10%. The Yield Curve Control (YCC) was maintained to target 10-year JGB yields at around 0.0%. The vote on YCC was made by 8-1 votes. The only dissenter was once again Mr. Katoaka.
Is a change of direction coming?
Going into the last BoJ meeting the obvious concern was the JPY weakness but the key aspect of this is whether there will be action from the BoJ. For years Japan has struggled to see any inflation, so with inflation rising around the world, it was interesting to see that the BoJ now does expect consumer inflation to rise. It also notes that short-term inflation expectations have risen. However, this is mainly attributed to energy prices and commodity gains. Both of these factors are expected to fade and medium-term inflation is expected to fall back lower again.
One standout factor to look out for is any FX intervention from Japan. The BoJ and the Japanese Gov’t let markets know that they are concerned about the JPY weakness. So, at some point, there could be a large amount of JPY strength if the Japanese Gov’t suddenly intervenes. This means traders should be very careful about staying short of the JPY as a sharp retracement could occur unannounced. Furthermore, the former Japanese FX chief Nakai said continuing YCC has many negative effects, so at some point, it seems the JPY weakness will be addressed. It’s just a question of when. This would mean sudden falls in the USDJPY should this occur.