USD/JPY Fundamental Daily Forecast – Lower on Japan Govt’s Plan for Easier Tweak of BOJ Inflation Target

The Dollar/Yen is trading lower on Monday on news that the Japanese government is preparing to revise a joint statement with the Bank of Japan (BOJ) over the latter’s inflation target, potentially making it easier for a tweak in the BOJ’s ultra-dovish monetary policy.

At 06:40 GMT, the USD/JPY is trading 136.005, down 0.738 or -0.54%. On Friday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $68.26, up $0.50 or +0.74%.

Traders are reacting to a report from Kyodo news agency from over the weekend that Prime Minister Fumio Kishida is aiming to make the BOJ’s 2% inflation target a more flexible goal by revising its decade-old joint statement with the central bank.

According to Reuters, the current statement commits the BOJ to achieving its inflation target “at the earliest date possible,” and the BOJ has steadfastly stuck to its dovish monetary policy. That stance and the resulting interest rate differentials with the rest of the world has caused the Yen to plunge more than 15% this year.

BOJ News Offsetting Hawkish Fed Member Comments

The Dollar/Yen is down for a second straight session despite Friday’s hawkish comments from three key policymakers.

On Friday, New York Federal Reserve President John Williams said on Friday it remains possible the U.S. central bank raises interest rates more than it currently expects next year, adding that he’s not expecting the economy to fall into recession as Fed policymakers press forward with action to tame unacceptably high inflation.

San Francisco Federal Reserve Bank President Mary Daly on Friday said it’s “reasonable” to think that once the Fed policy rate gets to its peak, it will stay there for nearly a year, and added she’s prepared to keep it there longer if needed.

Cleveland Federal Reserve bank President Loretta Mester said on Friday that she believes the U.S. central bank will have to raise interest rates higher than the level most policymakers cited in their Fed forecasts last week.

Short-Term Outlook

The immediate reaction to the BOJ news was bearish for the USD/JPY. But that move may have been a little pre-mature since Japan’s central bank policymakers still have to reveal their intent in revealing its plans for the change and how the new plan will be executed.

However, since it’s not likely to be implemented for months, policymakers still have time and flexibility to figure out what they are trying to accomplish.

Generally speaking, the news is likely to be bearish for the USD/JPY because it means the BOJ will become less-dovish. However, the amount of selling pressure will ultimately be determined by how high and for how long the Fed will raise its benchmark rate.