Bank of Japan meeting review – Monetary policy on hold for longer

The first Bank of Japan (BoJ) meeting of the year saw monetary policy kept unchanged as expected, while the outlook report reflected a more moderated view on inflation, hinting at interest rates being on hold for longer.

BoJ outlook report reflects lowered inflation expectations

In line with the market consensus, the BoJ kept monetary policy unchanged whereby the short-term deposit rate remains resting at -0.1% while its long-term interest rate under the yield curve control regime continues to see 10-year JGBs kept at around zero percent.

More importantly, it had been the outlook for economic activity and prices that was of interest on the central bank’s monetary policy trajectory. On one hand there had been the upward revision to growth as expected, whereby the median GDP forecast for fiscal year 2019 had been lifted to 0.8% year-on-year (YoY) from 0.6% and fiscal 2020’s raised to 0.9% from 0.7%. This follows Prime Minister Shinzo Abe’s $120 billion fiscal package aimed at curbing the downside risks to the Japanese economy. On the other hand, inflation forecasts had notably been trimmed by 0.1% each for fiscal 2019 and 2020 median CPI at 0.6% and 1.0% respectively, suggesting the likelihood for the Bank of Japan to be on hold for longer. Although BoJ governor Haruhiko Kuroda had emphasized that the bank does not see a change to the inflation trend and that the downward revision had been the effect of lowered crude oil prices, the evident gap from the 2.0% target that the BoJ had maintained reflects the likelihood that the BoJ will be on hold for longer. This had also been a view shared by the governor in the post meeting press conference.

USD/JPY price continues to see upside risks

The Japanese yen was seen retracing some of its recent losses against the greenback post the release of the meeting statement. USD/JPY edged down slightly to $110 levels after flatlining around $110.15 since Friday, reflecting some sense of disappointment even as most the conclusion had been expected. The fact of the matter remains that the BoJ have limited room given the macro conditions as they seek to stimulate growth post the H2 2019 slump from both natural disaster impact and external influences.

It had certainly helped seeing the recent improvement to risk sentiment on the back of data stabilisation across the likes of US and China, over and above the relief in trade tensions between the two countries in the signing of the phase one trade deal. USD/JPY had edged up from brief trips to $108 to trade mostly above $110 at the start of the week, supporting the Japanese market at the same time. While feasibility and compliance risks on the US-China phase one trade deal remains, the latest deal signing nevertheless marks the furthest progress both sides had achieved since the entrance into the trade war. At the same time, even though most of the tariffs remain in place, there is a lack of evidence at present to suggest concerns and thus one to keep the risk-on mood going. Some caution may be seen with the latest fear spreading over the new strain of Sars-like virus across North Asia, but the impact is still being estimated. Domestic influence could be limited in the medium term. From a technical perspective, the break past the $110 level also opens up further room on the upside, watching the next resistance at $110.90.

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