Bank of Japan holds policy unchanged

The Bank of Japan kept policy rates unchanged at its latest meeting, holding the policy balance rate at -0.1% and keeping the yield curve target for the 10yr JGB yield at 0%. The BoJ did revise their inflation expectations for 2022, however, to 2.3% on the core CPI from 1.9% previously. For the next two years the BoJ does expect inflation to move back below the 2% target, returning to the endemically low inflation in Japan. The bank also lowered their GDP forecast for 2022 to 2.4% from 2.9% previously.

The persistent accommodative stance from the BoJ places it increasingly at odds with central bank peers like the Federal Reserve in the US which has hiked rates by 150bps so far this year and will hike again by at a minimum of 75bps at its FOMC meeting next week. Unlike other central banks though the BoJ has long fought to increase inflation which has been perennially low in the country, noting in its statement that it will continue “expanding the monetary base until” inflation ex-fresh food rises above 2% on a sustained basis.

The BoJ’s outlier stance on maintaining accommodative policy has, among other reasons, pushed the JPY to a much weaker level so far this year. Immediate reaction in USDJPY to the policy decision was limited given that it was nearly uniformly expected by markets, but the pair is still up by nearly 17% year-to-date, the worst performance against the USD of any major currency. Japanese government 10yr bonds were little changed following the policy decision.

With neither the market nor the BoJ expecting any change in the policy outlook any time soon, movements in USDJPY will likely be impacted much more by the US side of the pairing. In the run up to the Fed FOMC next week we would expect US rates to have a more meaningly effect on the next trajectory for USDJPY with a surprise hike of 100bps for instance likely to help push the pair higher once again. Our target for USDJPY in Q3 is for 135 though risks to the upside look strong. Thereafter we expect USDJPY to begin to move lower, targeting 130 by the end of the year.