USD/JPY Fundamental Daily Forecast – BOJ Expected to Leave Rates Unchanged, Could Downgrade Economy

If the BoJ policymakers express more pessimism over Japan’s economic strength, then this would send a signal that the next policy change by the BOJ will be further easing.
James Hyerczyk
USD/JPY

The Dollar/Yen is trading lower on Thursday as investors square positions ahead of the release of the Bank of Japan interest rate decision, the BOJ monetary policy statement and the BOJ Outlook report. The central bank is widely expected to leave its ultra-low interest rate unchanged, but could downgrade its assessment of the economy.

At 02:37 GMT, the USD/JPY is trading 111.951, down 0.234 or -0.21%.

The BOJ has had nothing to celebrate since its last meeting during. At the current two day meeting it no doubt focused on what to do about the slowing household spending, a shrinking trade surplus, low consumer confidence, weak manufacturing services and industrial production growth, and muted inflation. So if it did make any major changes to policy, it would like be to the dovish side.

The divergence in monetary policy between the comparatively hawkish U.S. Federal Reserve and the perpetually dovish Bank of Japan favors the U.S. Dollar over the Japanese Yen. We continue to see more upside potential for the USD/JPY especially if the BOJ does nothing at this meeting.

BOJ Forecast

The BOJ is widely expected to release a new forecast that is expected to show Japan will fall short of its inflation target after nine years of unprecedented stimulus. This should put BOJ Governor Haruhiko Kuroda in the hot seat.

Bloomberg is saying that “The Bank of Japan’s initial price projection for the year starting in April 2021 and its growth forecasts will be the main focuses of the meeting, though neither is expected to budge the needle on policy. All but three of 48 economists surveyed by Bloomberg expect the central bank to maintain its yield curve control program and asset purchases at the meeting.”

“Economists predict the fiscal 2021 price forecast will be its lowest new projection looking two years into the future since Kuroda took the helm of the BOJ in 2013, promising 2 percent inflation in about two years. It would also mean that Kuroda is at risk of failing to hit the target before his second term ends in 2023.”

Policy Expectations

Look for Kuroda to stick to his line that momentum in prices has been maintained given that the forecasts will show an upward trajectory.

Kuroda is also likely to reiterate his view that the economy will pick up in the second half of the year.

The BOJ will also pledge to keep interest rates extremely low for an extended period of time. It is also expected to keep a rate of -0.1 percent on some reserves financial institutions keep at the central bank, and its yield target of about zero percent for 10-year Japanese government bonds.

Finally, if the BOJ policymakers express more pessimism over Japan’s economic strength, then this would send a signal that the next policy change by the BOJ will be further easing.

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