Bank of Japan Stands Pat, USD/JPY Rises

USD/JPY – H1

The Bank of Japan (BoJ) did not change its policy settings around the asset purchase program and the interest rates, but upgraded its inflation forecasts ^[1]. However, it still does not see it reaching the 2% target within the forecasted period (until March 2022).

The bank now projects y/y median CPI (ex. Fresh food) of +1.1% in fiscal 2022 and 2023, compared to 0.9% for FY 2022 and 1.0% for FY 2023 in the October projections.

BoJ also noted that "risks to economic activity are skewed to the downside for the time being, mainly due to the impact of COVID-19, but are generally balanced thereafter. Risks to prices are generally balanced."

The central bank of Japan is very dovish, since price pressures are weak, contrary to many of its peers like the Fed, which are spooked by Inflation surge.

Today's upgraded forecast were a bit on the hawkish side, but the Japanese Yen fails to benefit against the US Dollar, as rising treasury yields in the US work in favor of the latter, amidst aggressive market expectation around the Fed's rate hike path.

As such, the pair extends yesterday's rebound, after the worst weekly performance since September 2020 that stopped the five-week rally, which had culminated in this month's five year highs (116.35).

It now tests 115.00 above which it will have the chance to push for the 115.52 region, but it may still be early for bigger rise that will bring 115.84-96 in its crosshairs.

On the other hand, the move looks overextended and given US rate hike expectations and bond yields movement, the greenback seems tame. USD/JPY remains in a precarious positions and in risk of a return back below mid-114.00s, although a catalyst will be probably required for new weekly lows (114.10).

The economic calendar does not feature any tier-1 data today, but we will be waiting to see in what mood will US markets will return from their long weekend.