BoJ leaves policy unchanged but forecasts downgraded

The Bank of Japan, in its monetary policy meeting today, left interest rates and the monetary base unchanged at -0.10% and 80 trillion Yen while revising down its view on the economy, highlighting the difficulty as the bank struggles to revive growth. The decision to hold policy unchanged was widely expected among the analysts surveyed but the markets were open to potential surprises following January’s surprise rate cut, an unorthodox step that caught many by surprise and showed the desperation by the Central bank to reach its mandated inflation target.

The interest rates were left unchanged at -0.10% with a vote of 7 – 2 which included Kiuchi and Takehiro Sato who dissented opposing the negative interest rates. On the monetary base, the BoJ board almost unanimous with 1 dissenter to 8 votes to keep the current 80 trillion Yen in monetary base unchanged.

Japan’s economy contracted in the fourth quarter and is now expected to grow at a more subdued pace. Add to the slow pace of growth, real wages have showed no signs of a pickup with many expecting to see a flat wage growth over 2016. In its economic assessment, the BoJ noted that exports and production were sluggish but noted that the Japanese economy was not in full recovery as of yet.

Inflation expectations from the Bank were also downgraded noting that inflation could remain weak for the time being. In its statement, the BoJ references global risks to recovery citing the European debt problems and the expectations that the Federal Reserve would continue its rate hike cycle which would be detrimental to emerging markets which could influence Japan’s inflation trend to be negatively affected. The markets expect that the Bank of Japan will take a call at its meeting in April with the potential for expanding its QQE program.

Following the monetary policy meeting minutes, the Nikkei225 was down -0.68% as the markets await the BoJ’s press conference. USDJPY is down -0.56% at the time of writing after the Dollar opened the day at 113.79 and is currently trading at 113.12. The currency pair has remained flat over the past week trading above the 112.5 support and 114 resistance. However, short term price action is currently pointing to a strong consolidation between these levels with 114 coming in as a strong resistance level, which if broken could see a potential move to the upside with 117 – 117.5 likely to be tested.

Later today, US retail sales numbers and producers price index data will be released which will be the key fundamental risk ahead of the monthly US inflation data followed by the FOMC meeting due tomorrow. Expectations for the FOMC is that rates will remain unchanged at 0.25% – 0.50% but the Fed could send out a hawkish tone to the markets with June being the next meeting where the US fed funds rates could be increased by another 25bps.