The Japanese Yen moved lower mid-week in response to the latest Bank of Japan meeting which saw the central bank keeping rates unchanged, as expected while revising its inflation forecast lower. The revision, which saw the bank’s 2019 forecast moving to 0.9% from 1.1%, comes on the back of the bank earlier this year dropping its 2020 target of 2%, the level which has been the bank’s long-standing target throughout its massive stimulus programme.
In the quarterly report issued alongside the meeting statement, the bank said: “The momentum toward achieving the price stability target of 2.0% is maintained but is not yet sufficiently firm.”
The BOJ has come under heavy criticism over the recent year for continuing to maintain its easing policy despite many other central banks scaling out of accommodative policy. The BOJ has often blamed the “deflation mindset” fuelled by consumers and employers which have grown used to extended periods of subdued growth and deflation, though it has defended its accommodative policy as being necessary to help spur the economy towards its 2% target.
No Follow Through On Earlier YCC Movement
In the bank’s prior quarterly meeting in July, it seemed the BOJ was beginning to address some these concerns by increasing the upper end of the range on its yield curve control target to 0.2%. The market interpreted this as a sign that the bank’s policy was finally shifting and that such an act was a precursor to a more formal tightening move.
However, Kuroda was keen to clarify, at that meeting and since, that the move was in no way aimed at or a precursor to tightening policy, and was instead designed simply to add more volatility into the government bond market.
Indeed, speaking in September, the BOJ chief said that the BOJ had no designs to raise rates “for quite a long time,” telling a Japanese newspaper: “we don’t specify the period, such as whether it is one year, three years or five years,” adding “it’s a commitment that we will maintain the current low levels (of rates) as long as uncertainty lingers.”
Risks From Extended Low Rates
However, the BOJ did acknowledge the risks around such extended periods of low rates with a slightly sterner message than in January, saying “Prolonged downward pressure on financial institutions’ profits from low-interest rates… could destabilize the financial system. Although these risks are judged as not significant at this point, it’s necessary to pay close attention to future developments”. This marks a clear escalation since July when the BOJ simply said such risks were not materializing.
BOJ Highlights Trade War Risks
Regarding risks, the BOJ chief was also keen to point the finger at the US and China who remain locked in a disruptive trade war, stating “As protectionist moves and trade friction between the U.S. and China escalate, we pay the most attention to the downside risk that they could pose to their own countries and also global trade and the world economy.”
Following the bank’s YCC move in July and the apparent retreat, this time around it looks as though the escalation in trade conflict and the associated risks have likely taken the BOJ a little by surprise. The moves in July, despite the governor’s claims, appear to have been the start of a shift away from ultra-loose monetary policy but the developments we have seen since have likely paused the BOJ’s plans for now. With this in mind, if we see a dialing down in trade tension over the next six months, the issue of BOJ policy normalization could become more of a live one.
USDJPY has turned higher once again, finding support along the rising trend line from 2018 lows. For now, the key upside level to watch remains the 114.43 – 114.72 level which has been a major resistance level over the last two years.