The Bank of Japan is widely anticipated to maintain rates unchanged at -0.1% once again in their September meeting. No changes to the YCC are expected either, as the BoJ is well-known for being a slow machine.
As inflation in Japan has been exceeding the BoJ’s 2% target for over a year, policymakers have been under increased pressure to change course and tighten monetary policy.
On a negative note, wage growth remains subdued, and the central bank has remarked that higher wages are a prerequisite for moving away from monetary stimulus. Average cash earnings in Japan rose by 1.3% YoY in July, slowing from 2.3% in June, although up for the nineteenth consecutive month.
As inflation rose, the central bank introduced changes to the yield curve control, allowing the 10-year yield on the Japanese Government Bond (JGB) to move in a wider band. Bottom line, the central bank has decided to intervene only when the 10-year JGB yield moves past 1.0%.
What puzzles investors and may introduce noise to the announcement is Governor Kazuo Ueda's latest comments. In an interview with the Yomiuri Shimbun, Ueda said the monetary policy tweak in July was “a mechanism to change the balance between the effects and side effects” of monetary easing measures. But he also added that the focus will shift to a “quiet exit” from the ultra-loose policy to avoid any significant impact.
However, financial markets head into the event with little hope of a relevant change in the forward guidance. “It seems that the Japanese central bankers want a stronger Yen, but without this being based on the expectation of a less expansionary monetary policy,” economists at Commerzbank said in a research note.
Ueda’s words raised some alarms. Financial markets began speculating on a potential shift, although not for this year. The Nikkei reported, “A January decision to end negative interest rates appears to be a more realistic scenario, with practical factors delaying implementation to February. The BoJ is set to update its economic and price outlook for fiscal 2023 to fiscal 2025 at that time, giving it material to help explain the basis for the policy change.”
If the Bank of Japan introduces a hawkish shift, USD/JPY could plunge. The fall could be substantial considering the pair trades near this year’s high at 148.45, having appreciated sharply after bottoming at 127.21 in January.
Valeria Bednarik, Chief Analyst at FXStreet, said: “There are no technical signs suggesting the USD/JPY rally is over. On the contrary, the pair could keep running towards the 2022 high at 151.93 in the upcoming weeks, particularly if the market sentiment remains depressed, boosting demand for the American currency.
From a technical point of view, the pair is bullish in its daily chart, with the 20-day Simple Moving Average (SMA) leading the way north, as per advancing above also bullish longer moving averages. The 20-day SMA is currently located at around 146.90, a potential bearish target should the BoJ surprise with a hawkish message. Below such area, the slump could continue towards 146.05.”
Bednarik added: “Keep in mind the initial reaction may not lead to a long-lasting trend, particularly if it results against the current bullish trend. Also, government bond yields reaction could provide clues on what to expect after the dust settles.”
