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Bank of Japan (BoJ) preview: USD/JPY remains in a rising channel pattern

The BoJ is set to hold their monetary meeting across 15 – 16 June 2023, while speculations for a quicker policy shift from the BoJ have not been receiving much validation by policymakers.

Bank of Japan Source: Bloomberg

What to expect at the upcoming Bank of Japan (BoJ) meeting?

Speculations for a quicker policy shift from the BoJ have not been receiving much validation by policymakers thus far, as a continued dovish rhetoric from BoJ Governor Kazuo Ueda has led initial hawkish bets positioned for the new leadership change to fizzle out quickly. Patience is still the takeaway from the Governor’s recent comments to end last week, where he emphasised the need to continue with monetary easing as more work is still needed in attaining its 2% price target in ‘a stable and sustainable manner’.

With that, current rate expectations have remained anchored for a no-change in policy rate for at least the next three policy meetings, with an almost-certain 98% probability being priced for its negative interest rate policy (NIRP) to continue this week. The showdown between bond traders and the BoJ has also fizzled off lately, with bond traders throwing in the towel on challenging Japan’s 10-year bond yield cap at 0.50% since May this year.

Bank of Japan meeting date Source: Refinitiv
Bank of Japan meeting date Source: Refinitiv

Pressures for a policy pivot still present, but not yet

The next set of economic projections will only come during the July meeting, therefore clues on Japan’s growth and inflation outlook will have to be inferred from the Governor’s comments. Thus far, the reopening of borders has been a positive for corporate and household spending, but the strength will have to be pitted against a declining export growth outlook. The 2.6% read for April exports has translated to the weakest gain since February 2021. Overall, the economic surprise index for Japan remains in negative territory, providing some validation for accommodative policies to remain before a more sustained recovery picture is presented.

Citi Economic Surprise Index - Japan Source: Refinitiv
Citi Economic Surprise Index - Japan Source: Refinitiv

On the other hand, a continued pull-ahead in Japan’s “core core” inflation to more than two-fold its 2% target (4.1% in April 2023) has been constantly looked upon as an argument for a quicker policy shift by the hawks. But with the BoJ setting its sight on wage growth as a factor in its policy decision, a sustained move above the 2% level may be required on that front. Currently, it still sits at a subdued 1% growth, which could be tapped on by the central bank to justify its ‘transitory inflation’ view. Japan's wage dynamics could be due for a change over the coming months however, with the shunto wage negotiations concluding with a 3.8% pay rise – the highest since 1993. Any uptick in the wage numbers will be one to watch moving forward.

Japan's "core core"inflation vs average cash earnings Source: Refinitiv
Japan's "core core"inflation vs average cash earnings Source: Refinitiv

USD/JPY: Rising channel pattern in place since the start of the year

The USD/JPY has been trading within a rising channel pattern over the past months, with a reclaim of its 200-day moving average (MA) and Ichimoku cloud resistance suggesting that the bulls are in control. Since May this year, a renewed rise in US Treasury yields has been supporting a widening yield differential with the Japanese 10-year Government Bond (JGB), which aided to uplift the pair to a new six-month high. With the US 10-year yield hovering at its three-month high ahead of the upcoming Federal Open Market Committee (FOMC) meeting, any break to a new higher high may translate to an in-tandem rise in the USD/JPY.

Near-term, recent moves for the pair seem to be in consolidation mode, largely on some wait-and-see as the Federal Reserve’s (Fed) decision looms. The formation of a bullish pennant is still presented however, leaving any break above the pennant on watch to provide further upside to the upper channel trendline resistance next (142.00 level). On the downside, any breakdown of the pennant could leave the 137.00 level on watch for any formation of a new higher low.

USD/JPY Mini Source: IG charts
USD/JPY Mini Source: IG charts

This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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