As expected, the BOJ kicked off the year by keeping its monetary policy unchanged. However, bulls were once again dealt a blow as the bank slashed its inflation forecast yet again.
This is now the fourth consecutive downgrade to the BOJ’s inflation forecast which, for the fiscal year starting in April, has been lowered to 0.9% from 1.4% at the last forecast update.
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Oil Prices Blamed For Inflation Outlook Downgrade
In cutting its inflation forecast yet again, the bank cited the sharp collapse in oil prices as the main driver. Furthermore, the bank added that its latest forecasts didn’t include the expected impact of reductions in cell phone fees or that of the government programme to provide young children with free education.
The education program alone could cut another 0.3% from inflation over the 2019 fiscal year and a further 0.4% next year which would effectively bring the inflation level down to 0.6% and 1% respectively.
Commenting on movements in CPI, Kuroda said:
“The rate of change in the consumer price index has been positive but continued to show relatively weak developments compared to the economic expansion and the labor market tightening.”
The latest inflation figures for Japan showed CPI slipping to 0.7% in December as the decline in oil prices took its toll. While the BOJ maintains that momentum in inflation back to 2% is intact, it acknowledges that the path is weak. This is a view echoed by many key industry players with numerous economists forecasting Japanese inflation to fall below 0% this year.
IMF Forecasts Economy To Grow Quicker Than Previously Expected
However, despite the downgraded inflation forecasts, there were some positives in the meeting as the BOJ upgraded its growth outlook, echoing the latest forecast from the IMF just days ago. The IMF projects the Japanese economy to grow at a quicker pace than previously expected over 2019, due to fresh fiscal support.
BOJ Out Of Options?
In all, the meeting was seen as a dovish development raising serious questions about the likelihood of Japanese inflation making it back to 2% in the coming years.
Furthermore, the fact that the BOJ has lowered its inflation forecast for the fourth consecutive meeting without enacting any additional measures to boost inflation, highlights the lack of options available to the BOJ at this stage. This is due to the bank running its massive QQE and negative rates program for so long.
The topic, which has been hotly debated over the last year, will no doubt receive further attention now in the wake of this meeting.
The monthly chart in USDJPY is flagging up key technical development which I will be watching closely over the final week of the month. You can see that as price traded back down through the rising trend line from 2016 lows, there was a strong rejection by buyers who drove price right back up to where we currently are.
At this point, price is printing a large monthly bullish pin bar candle suggesting the likelihood of further continuation higher. The location of the candle, at the retest of both the broken bearish trend line from 2015 highs and the rising trend line from 2016 lows further strengthens the view that USDJPY is set to pop higher. We could easily see a move back up to at least the 114.58 level over the coming months.