USD/JPY Fundamental Daily Forecast – BOJ Sees Rising Wages, Fading Deflation Risks as Keys to Policy Change

The Dollar/Yen is edging higher on Wednesday despite a surge in short-term government bond yields to their highest level in over seven-and-a-half years, following an auction that attracted relatively weak demand.

Nonetheless, the Forex pair is heading for its biggest quarterly loss against the Japanese Yen since 2008, with a decline of 8.1%, following a surprise decision last week by the Bank of Japan (BOJ) to adjust its monetary policy.

At 05:34 GMT, the USD/JPY is trading 133.484, down 0.022 or -0.02%. On Tuesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $69.82, down $0.36 or -0.51%.

BOJ’s Kuroda Speaks

On Monday, BOJ Governor Haruhiko Kuroda dismissed the chance of a near-term exit from ultra-loose monetary policy, even as markets and policymakers are signaling an increasing focus on what comes after Kuroda’s tenure ends in April next year.

Bank of Japan Summary of Opinions

Earlier today, the Bank of Japan (BOJ) released a summary of opinions of their December meeting, in which policymakers saw the need to keep ultra-low interest rates but discussed growing prospects that higher wages could finally eradicate the risk of a return to deflation.

“Price rises are accelerating not just for goods but for services… There’s a chance Japan’s inflationary momentum is heightening,” one member was quoted as saying in the summary, released on Wednesday.

At the Dec. 19-20 meeting, the BOJ kept its ultra-easy policy but shocked markets with a surprise tweak to its bond yield control that allows long-term interest rates to rise more.

Several in the nine-member board said the decision was aimed at making the current stimulus program more sustainable by addressing its side-effects, rather than a step toward ending ultra-loose monetary policy, the summary showed.

But discussions at the board delved into signs of change in Japan’s price outlook that could lay the groundwork for a withdrawal of stimulus when Kuroda departs next year.

While some in the board said Japan has yet to sustainably hit the central bank’s 2% inflation target, others saw signs of change in companies’ prolonged aversion to raising wages and prices.

“Consumer prices are approaching a state seen before Japan’s deflationary period,” one member said, pointing to the growing ratio of items seeing prices rise. “This could be a sign of progress toward achieving a situation where Japan won’t return to deflation,” the member said.

Short-Term Outlook

The USD/JPY continues to ease higher although the debate over when the BOJ will finally move away from its ultra-dovish policy could keep a lid on gains. It looks as if policymakers are going to wait for Kuroda to retire before making their move so we may not see any major changes until April.

We believe that traders are going to allow the USD/JPY to rise into a resistance area before implementing new shorts. Selling could begin on a test of 134.365 or on a return to 136.135 – 139.154.

Traders expect the BOJ to raise its inflation forecasts in its fresh quarterly growth and price outlook, set for release after the bank’s next policy meeting on Jan. 17-18.

This report should solidify the chances of a move into more hawkish policy.