USD/JPY Fundamental Daily Forecast – BOJ Policymakers Dealing With Anemic Inflation, Still-Fragile Recovery

The Dollar/Yen is edging lower early Wednesday as traders position themselves ahead of Thursday’s Bank of Japan (BOJ) monetary policy decisions.

The BOJ is expected to maintain its massive stimulus program and slash this year’s inflation forecast when it meets on Thursday, showing again that it has no intention of following other central banks in backing away from pandemic policies.

At 07:33 GMT, the USD/JPY is trading 113.923, down 0.225 or -0.20%.

BOJ to Defy Global Rate Hike Trend, Cut Price Outlook

The Bank of Japan is set to maintain its massive stimulus program on Thursday and slash this year’s inflation forecast in a sign it has no intention to follow other central banks eyeing exits from crisis-mode policies, according to Reuters.

While rising raw material prices have pushed Japan’s wholesale inflation to a 13-year high, consumer inflation is stuck around zero as weak domestic spending prevents firms from passing on higher costs to households, Reuters added.

In fresh quarterly projections, the BOJ is seen cutting this year’s growth and inflation estimates, but sticking to its forecast of a moderate recovery, sources have told Reuters.

The markets are focusing on whether BOJ Governor Haruhiko Kuroda will issue any warning against the yen’s recent weakness, which gives exports a boost but drives up already high import costs for retailers still reeling from the pandemic’s pain, Reuters concluded.

Daily Forecast

“Globally, central banks are shifting toward responding to heightening inflation with rate hikes. But it’s hard to see the BOJ becoming hawkish,” partly because cost-push inflation alone won’t prop up inflation to its 2% target, said Hiroshi Ugai, chief Japan economist at JPMorgan Securities.

Translation: The Japanese Yen may be the weakest major currency on the board when using the “high inflation, interest rate hike” scenario.

It seems the only chance the Yen has of rallying is during times of safe-haven buying when investors need a place to park their stock market profits.

Anemic inflation and Japan’s still-fragile recovery will give the BOJ enough reason to maintain its target for short-term interest rates at -0.1% and that for 10-year bond yields around 0% at its two-day policy meeting ending on Thursday.