There is a growing consensus that the BOJ will join other central banks in raising rates at the upcoming September meeting, which has allowed the yen to gain against the dollar recently. Although the pair remains above its lows from last week, the post-intervention uptrend appears to have been interrupted, with analysts citing the BOJ’s outlook.
However, it’s still almost a full month until the meeting, and a lot can happen in that time. Specifically, over the next couple of days, several important data releases could shift market expectations about what the BOJ will do. Not only that, but also on whether BOJ action will actually shore up the yen. After all, the last time the BOJ raised rates, the currency actually weakened afterwards.
What the Market is Looking For
For the yen to remain firm, the market will need to be convinced that the data supports a BOJ rate hike. There isn’t much doubt that Japan’s central bank wants to tighten policy, since that would address a series of difficulties the country is facing, including a weaker currency. However, it still has to justify the move, and if inflation is not trending in the right direction, then the BOJ will find it difficult to justify a hike and potentially punt to the next meeting. That would likely weaken the yen substantially, and could raise the possibility of further intervention if the pair rises too fast again.
Before the main data comes out, however, Japan will publish its trade balance on Thursday. The widening trade deficit is one of the factors contributing to the weaker yen, as higher crude prices increase capital outflows to pay for imports. Therefore, a surprise reduction in the deficit could ease some of the pressure on the yen and make the BOJ less likely to intervene. The consensus is for Japan’s trade balance to fall further into negative territory to -JPY500 billion, compared to -JPY406.9 billion a month earlier.
CPI vs PMI, as BOJ Weighs on Growth
Next up on Friday is Japan’s July CPI, which is expected to remain unchanged at 1.7%. The so-called “core-core” rate, which excludes food and energy prices and is roughly equivalent to other countries’ “core” rate, is also projected to stay unchanged at 1.7%. This is below the BOJ’s 2.0% target.
This poses a problem for hiking, but does not make it impossible. The BOJ has long warned that inflation is likely to rise, and a weaker yen is certainly a contributing factor given Japan’s reliance on imports. But if the inflation rate were to unexpectedly drop, the chances of a BOJ hike might go down, and the yen could weaken as a result.
Stronger Yen Weakens BOJ Hawk Position
An hour later, another data point could be significant for the market: the August flash PMI. The BOJ can afford to hike if the economy is ticking along well, which, in itself, is pro-inflationary. If there is a substantial slowdown in the PMI reading, it could also prompt markets to reduce the chances of a rate hike.
Japan’s flash August composite PMI is projected to move further into expansion, to 51.5, up from 51.2 previously. The market is pretty sure that the September meeting will be a hike, so there is less room for an upward surprise, which puts the risk more towards the yen weakening.
