BoJ raises economic assessment while keeping policy steady

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Bank of Japan April Meeting Summary:

  • Interest rates left unchanged at -0.10%
  • QQE purchases unchanged at 80 trillion yen
  • 2017 – 2018 GDP forecasts increased from 1.5% to 1.6%
  • 2017 – 2018 (core) inflation forecasts reduced from 1.5% to 1.4%
  • Inflation goal expected to be reached by April 2018

As widely expected, the Bank of Japan at its monetary policy meeting today in Tokyo left the interest rates unchanged at -0.10% and also kept the QQE purchases steady at 80 trillion yen.

The policy decision was expected as some BoJ officials commented previously that the central bank would be maintaining its loose monetary policy until it reached the inflation target. Officials embarked on a campaign to highlight the weaker pace of inflation in a bid to quash any speculation of tapering.

At the meeting today, BoJ officials said that inflation was still lagging behind the forecasts it made previously but gave an upbeat view of the economy as the central bank raised the GDP growth forecasts for the current fiscal year.

According to the new economic forecasts, the BoJ expects the real GDP to grow at a pace of 1.6% for the fiscal year 2017 – 2018. This was slightly higher from its previous projections of 1.5% in January this year. The core consumer price index, which excludes the volatile food and energy prices, was forecast to rise 1.4% during the same fiscal year. This was lower than the January’s estimates of 1.5%.

Global demand for exports has managed to support the economy alongside a weaker monetary policy; however, despite years of maintaining an accommodative stance, inflation continues to be the biggest factor for the BoJ which has continued to remain sluggish despite inflation picking up in other economies.

The message from today’s BoJ policy meeting was loud and clear that the central bank has no intentions of tightening monetary policy until inflation started to show signs of strength. The central bank maintained its inflation target of April 2018 which is when the BoJ expects that it will reach its inflation goal.

Japan Inflation 2704

Source: Bloomberg

Interestingly, this is around the same time when the BoJ Governor, Kuroda’s term ends.

As with most monetary policy expectations, market participants are of the view that the next policy move by the BoJ will be to announce a tightening measure, ruling out further easing. Expectations are high that consumer prices will pick up in the coming months on the back of higher energy prices and a weaker exchange rate.

The next Bank of Japan’s meeting is scheduled for June

The Japanese yen was largely muted to the BoJ’s announcement today as the meeting failed to offer anything new to the markets. After rallying to a fresh one-month high at 111.772 yesterday, the dollar gave up most of the gains to close almost flat by the end of the day.

At the time of writing, USDJPY is attempting to regain some of the lost ground as USDJPY is seen currently trading 0.2% higher on the day. Price will need to break out from within yesterday’s range to the upside in order to continue keeping up the bullish momentum. However, there are significant risks as a failure to break out higher could signal a pullback that could eventually see the price falling back to fill the gap from this Monday at 109.093.

In the near term, USDJPY will be at risk with a lot of themes playing out, namely the second round of French elections due on May 7th while investors continue to look for cues from the Trump administration on his policies.

Later today, the European Central Bank will be in focus although no changes are expected from the ECB today.

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