The Bank of Japan Met Expectations with a Tight Grip on Ultra-Low Rates

This morning, the Bank of Japan held ultra-low interest rates unchanged. Significantly, the BoJ also stuck to its dovish forward guidance, leaving Japan in the cold as other central banks look to tackle inflation amidst the ever-present threat of domestic economic recessions.

The BoJ delivered mixed projections for growth and consumer prices to add to the uncertainty.

While revising down growth forecasts from a range of +2.2% to +2.5% to +1.8% to +2.1%, the Bank revised up its CPI forecasts. For Fiscal 2022, the Bank projects CPI (all items less fresh food) of between +2.8% and +2.9%, up from +2.2% to +2.4% in July.

The Bank also highlighted extremely high uncertainties for the Japanese economy, including

• Overseas economic activity and prices,
• The situation surrounding Ukraine and commodity prices.
• The course of COVID-19 at home and abroad and its impact.

With regard to the risk balance, the Bank noted that risks to the economy are skewed to the downside and the upside for prices.

The Japanese Yen responded to the policy decision, sliding to a low of 147.37 against the greenback.

The Bank of Japan Stands Out from Other Central Banks

Central banks have been in the spotlight this week. Economic uncertainty, relentless inflationary pressure, and the war in Ukraine have muddied the waters, leaving markets with a high degree of uncertainty to navigate.

The uncertainty has driven market volatility across the global financial markets. The FX, equity, commodities, bond, and even the crypto market remain beholden to forward guidance and policy decisions.

While political instability has added to the list of considerations for investors, central banks continue to surprise the markets.

On Wednesday, the Bank of Canada fell short of market expectations with a 50-basis point rate hike. Since the policy decision, the Loonie has faced a series of choppy sessions.

The ECB was in the spotlight on Thursday. While delivering an in-line-with-expectations 75-basis point rate hike, ECB President Lagarde stated the need to wait for statistics in December to project growth, inflation, and the ECB’s plans to bring inflation to target.

Policy uncertainty left the EUR/USD in negative territory on Thursday and through today’s morning session.

Later today, US economic indicators could add further confusion. US inflation, personal spending, and consumer sentiment will be in the spotlight. Following better-than-expected Q3 US GDP numbers on Thursday, an unexpected pickup in inflationary pressure could refuel the bets of a hawkish December hike.

This week, US economic indicators have delivered mixed signals on whether the Fed will pivot in December.

For the Japanese Yen, interventions have failed to deliver sustained Yen price support. Other major currencies are also at risk of sizeable moves, with FOMC members unable to speak to guide the markets following today’s stats. The FOMC blackout period started on Saturday and will extend until November 3, leaving the markets to second guess what’s on the horizon.