The Bank of Japan Maintained Easing Policy, Made Rare FX Reference

BoJ Maintains Stimulatory Stance

The Bank of Japan (BoJ) did not make any changes to its massive monetary easing policy and kept rates at -0.1, while maintaining its forward guidance for the short and long-term rates to "remain at their present or lower level". ^[1]

The central bank often steps in to the bond market in order to contain unwanted rises in the yields, having done so, multiple times this week ^[2]. Today it reiterated the pledge to buy "a necessary amount" of Japanese government bonds (JGBs), so that 10-year JGB yields will remain near 0%, offering to purchase them at 0.25% on "every business day".

Of course, none of this comes as a surprise, despite the recent surge in inflation, since we have recently seen officials reaffirming their determination to stick with the massive stimulus. Governor Kuroda for instance had noted in a speech earlier this month, that policy makers "will take a strong stance on continuing with monetary easing" ^[3].

Rare FX Reference

This commitment to monetary stimulus, with sub-zero internet rates and constant interventions in the bond market, have created an eye-watering plunge to the Japanese Yen, which loses more than 15% year-to-date against the USDollar.

Although a weaker Yen is often seen as a boon to the economy, since Japan is an exporting country, the recent surge in energy and commodity prices works against that, hurting consumers and businesses.

This led the Bank of Japan to make an unaccustomed FX reference, saying that "it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan's economic activity and prices".

It remains to be seen whether this is a first small step towards policy normalization, but although this statement carries quite some weight given its rarity, it was probably rather soft.

Economic Growth & Inflation

The Japanese economy shrunk by 0.5% in the first quarter of the year (annualized), although this was better than the -1% first preliminary reading.

The BoJ sounded upbeat today, saying that the economy has "picked up as a trend" and is likely to recover, but warned of "extremely high" uncertainty and "downward pressure stemming from the rise in commodity prices due to factors such as the situation surrounding Ukraine".

The World Bank slashed its global growth forecast this month and expects Japan GDP growth to stay at 1.7% this year before slowing down to +1.3% in 2023 and 0.6% in 2024 .

The uber-easy monetary policy from Japan's central seems well justified, if we take into consideration the aforementioned GDP contraction and the exporting status of the country.

Given surging commodity prices however, the Yen's demise puts upward pressure on inflation. Last month's data revealed that the Consumer Price Index (less fresh food) jumped past the bank's 2% target in April, to the highest level since 2015, with the latest update due next week.

Officials have so far dismissed this rise in prices, which is reasonable, since Japan has traditionally been plagued by the opposite problem: deflation. Today the bank noted that CPI is likely to hover around 2% "for the time being", but it is expected to "decelerate thereafter".

BoJ Isolation

Today's announcement by the Bank of Japan reaffirmed the stark policy divergence compared to its major counterparts and isolates it further, since the rest of the world tightens, to combat surging Inflation.

Earlier this week, the US Fed delivered its biggest rate hike in nearly 30 years, reacting to the recent CPI jump, while the Bank of England raised rates for the fifth time in a row, despite fears of impending recession.

Even the European Central Bank announced last week a plan to deliver multiple interest rate increases, starting with 25 basis points in July.

USD/JPY Reaction

The pair had reached its highest levels since 1998 at the beginning of the week (135.61), but then corrected to mid-131.00, as we had expected from our last analysis. Today it returns to positive territory, as the BoJ reasserted its uber-dovish stance and the rare FX reference did not weigh on USD/JPY.

The policy differential remains unfavorable for the pair and from a technical prospective, the shallow correction, gives the greenback the chance to resume its advance.