Bank of Japan maintains easing bias. No changes to policy

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  • BoJ meeting largely a non-event. No major policy changes
  • Interest rates remain at -0.10%
  • BoJ’s QQE remains at 80 trillion yen
  • BoJ upgrades GDP growth by 0.1 percentage point
  • BoJ maintains subdued inflation rate

The Bank of Japan’s monetary policy meeting was held earlier today. As widely expected, the central bank left interest rates unchanged at -0.10% and maintained its current pace of easing at 80 trillion yen.

The BoJ’s meeting follows that of the Federal Reserve Bank which hiked the short-term interest rates.

The policymaker board at the BoJ voted unanimously to keep the target yield for the 10-year Japanese Government Bonds (JGB’s) at or around zero. The central bank reiterated its commitment to maintaining the easing bias which was aimed at lifting inflation.

The central bank raised the economic assessment at the meeting as well. The GDP growth forecasts were upgraded to 1.6% from 1.5% for the fiscal year 2017 – 18. The central bank, however, lowered the core CPI forecasts to 1.4%, from the current 1.5% in the same period.

“Private consumption has increased resilience against a background of steady improvement in the employment and income situation,” the BOJ said in a statement.

However, inflation in Japan continues to remain weak.

The central bank switched to controlling both the short and long-term yields on bonds or interest rates. This new policy mechanism was revamped last September with the move seen by many as the central bank’s commitment to lifting inflation.

Ahead of the BoJ’s meeting, the markets were expecting the central bank to give more clarity on the possible adjustments to the monetary policy program. Talks about exiting the stimulus program have been doing rounds for a couple of months already.

Despite maintaining the easing at a pace of 80 trillion yen, the actual pace of bond purchases by the BoJ has significantly fallen. By some estimates, the BoJ’s bond purchases are expected to be around 60 billion.

The market expectations come at a time when the inflation rate is still below the BoJ’s 2% target rate and is far from being close.

The BoJ’s policy is now starkly in contrast to that of the Fed. The Federal Reserve signaled at its policy meeting earlier this week that it would begin unwinding its balance sheet at a pace of $10 billion per month.

The Fed is expected to begin its unwinding operations as early as October.

Central bank watchers are expecting the BoJ Governor Kuroda to talk about exiting the program at some point in time, even if it means that the statement will have to be altered at a later stage if inflation continues to remain soft.

USDJPY Technical Outlook

The reaction to the event was that the USDJPY continued to push higher, extending the gains from yesterday after closing at 111.25. Technically, price action is now close to reaching for 111.61 resistance level in the near term.

USDJPY - Technical Outlook
USDJPY – Technical Outlook

Further gains in USDJPY is likely to be maintained, given the current monetary policy divergence. The economic data from the U.S. could, however, dampen the market expectations, unless we get to see a pick up in the economy, both on inflation and growth.


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