The upcoming BOJ meeting is expected to be a “live” one, as much as a BOJ meeting can be in the current circumstances. Naturally, the overwhelming consensus is that there won’t be any change in the rate. But conditions have changed over the last month to warrant many analysts to speculate that the bank could adjust its yield curve control mechanism again.
On top of that is the release of the bank’s projections for the rest of the year, which could be the set up for preparing the market to begin rate hikes sometime in the next several quarters. This event could be the major catalyst for the currency, and break the doldrums the USDJPY has been in for the last several weeks.
Getting Past the 150 Handle
Just last week, the dollar-yen poked above what is seen as the critical level of 150, which is where the BOJ intervened the last time around. But, apparently, Japanese officials didn’t do anything about it beyond the routine threats of intervention if “necessary”. The pair has been unusually flat around that level, as well, with the lowest level of volatility in months. Something has got to change.
The weak yen is putting a lot of pressure on the BOJ. On the one hand, it’s good for the economy, because it raises profits from exports. On the other, it increases inflationary pressures in a “non-organic” way. The higher costs of goods eventually would weigh on Japanese purchasing power and could lead to a slowing down in the economy. For this reason, BOJ Governor Kazuo Ueda keeps talking about “sustained” inflation staying above the 2.0% target.
Repeating What Has Already Worked
Inflation has overshot the target for months now, but the theory is that it’s not due to the regular growth of the economy, so it isn’t something that the BOJ should be stepping in to stop.
One of the things the BOJ could do to support the currency without a major change in policy is to shift the band of the YCC higher. This would allow yields on the benchmark 10-year bond to rise more, and could strengthen the yen.
The BOJ would have a hard job of arguing it’s policy neutral like they did the last time they widened the band. Another option is to leave the band where it is, but attach it to a shorter term bond, such as the 5-year. This would also allow bonds to drift higher and support the yen.
Rolling Out the Big Guns
The other thing that could happen is the BOJ could raise its forecast for economic growth this year. That means the economy is producing more “organic” inflation that would justify stepping away from the ultra-low policy. The projections could also show that inflation next year is expected to average above 2.0% (the last forecast predicted 1.9%), and that will likely be understood by the market as a sign that the BOJ will hike in order to bring long-term inflation down to target.
As it stands, there is a distinct possibility that if the BOJ doesn’t provide some indication of tightening (either now, in YCC adjustment; or later in predicting higher inflation), the market could challenge authorities and try to weaken the yen further. That might finally prompt an official intervention. Note that tomorrow will also see the formal release of the monthly record of intervention, and we will know if it was the BOJ stepping in that cause the large fluctuation in the currency back at the start of the month.
