Morning Commentary: The Bank of Japan: Cruise Control
A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
The Bank of Japan: Cruise Control
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Andrew Kositkun Senior FX Advisor
The Bank of Japan (BoJ) meets next week for what should be a non-event. The central bank is expected to maintain the status quo on all key policy settings, including the +/- .25% band around its zero-percent 10-year yield target.
Just a month ago, the BoJ wrapped up its exhaustive review of monetary policy and delivered three small tweaks to enhance the sustainability of the bank’s easing program. The bank made adjustments to the three-tier deposit rate scheme to soften the impact of future rate cuts; clarified the permissible trading range around its zero-percent 10-year yield target; and introduced further flexibility to its ETF and J-REIT purchase programs.
With little drama expected at the next BoJ meeting, market focus should be on the bank’s latest update on the Japanese economy and inflation outlook. Broadly speaking, the BoJ should keep its existing view of a gradual recovery led by export and capital expenditures. It is possible that the 2021–2022 growth outlook could be revised up modestly to reflect better than expected gross domestic product data and stronger projections for global growth from the International Monetary Fund (on which the BoJ bases its forecasts for external demand). However, the expectation remains for the board to assess that “risks to both economic activity and prices are skewed to the downside, mainly due to the impact of COVID-19.”
Indeed, Japan’s fourth COVID-19 wave continues to worsen, and Prime Minister Suga has declared a new state of emergency (SOE) in the Tokyo, Osaka, Kyoto and Hyogo prefectures. Together, these four prefectures account for roughly 25% of the population. With new measures stricter than those taken before, the current SOE could lead to a sharper contraction in consumption than what was seen during the second SOE.
Overall, the BoJ is likely entering into another quiet period as it has already adjusted its policy program to carry it through the next several quarters. In the U.S., focus is turning to the timing of Fed normalization. Conversely, Japan is suffering from a lagging domestic recovery due to slower vaccinations and persistently weak inflation that puts the BoJ well behind other developed market central banks.
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