Bank of Japan preview - watching politics instead

The on-going Bank of Japan (BoJ) meeting finds the conclusion due 19 September with markets widely expecting the BoJ to hold steady, an assumption likely to remain status quo for a long time to come.

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Source: Bloomberg

The true focus for the week, however, would be with trade tensions instead amid the uptrend for USD/JPY.

Holding steady for an extended period

Having stated in their July monetary policy statement and via BoJ governor Kuroda’s comments, the BoJ is clearly committed to holding interest rates steady for ‘an extended period of time’. This had followed the recent introduction of flexibility to their policy in July, reflecting their intent to guide the market’s expectation in the direction of a steady policy even with a move being the eventuality.

Indeed, examining the situation, with the Japanese economy still heavily reliant upon the monetary stimulus, any move would be pulling the rug from under the feet for Japan at present. This is amid the mixed situation within the economy where the latest positive Q2 growth, the quickest since Q1 2016 at 3.0% year-on-year, had been accompanied by the sustained lack of inflation growth, last seen at 0.8% year-on-year for the core reading in July. The Bank of Japan has their eyes set on a 2 percent target for the country’s inflation growth to align with the performance of a healthy economy, one that has the market questioning. While BoJ governor Kuroda may well face questions regarding the lack of bond yield fluctuations following July’s changes, comments here may lack the gunpowder to move prices. A non-event will most likely characterise the upcoming meeting after having seen them introduce changes only recently as with the European Central Bank.

Politics uncertainty

The bigger question in the week may, however, be how much further the current trade tension escalation would take markets. Over and above the rise of the incoming 10% tariffs on the $200 billion imports to 25% by the end of the year, President Donald Trump had promised further tariffs on the remaining $267 billion worth of imports should China retaliate, which deviates significantly from the initial anticipation of merely 10%. This does place the Chinese authorities between a rock and a hard place with the need to preserve China’s position while attempting to seek solution with the US. Unless China blinks first, it appears that escalation would be in place and that would not bode well for markets nor investors sentiment given the uncertainty. In turn, the reaction would be cutting across to the currency market for the safe haven yen.

As it is, reactions had been limited following the Monday announcement as traders appear to be starting the course early in fading the initial reaction. Prices spiked at one point to a 1-month high of $112.12. Technical analysis suggests that the trend is a bullish one for the USD/JPY pair, both from the price trajectory and the MACD, which could in part explain the move. The latest breakout from the $111.77 resistance also provides the pair with further room to run. That said, watch for Chinese retaliation and further US moves as mentioned above for any hints to derail the current run. One should not be surprised to find this being a long draw process. Any escalation could hit the AUD/JPY and NZD/JPY heaviest among others in light of the proximity for the pacific region to China.

USD/JPY

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