JPY: Still doubting the BoJ? - Rabobank

The BoJ’s two newest Deputy Governors officially assumed their roles today having been approved by parliament last week, points out Jane Foley, Senior FX Strategist at Rabobank.

Key Quotes

“Both Wakatabe and Amamiya made several dovish comments in their inaugural press conference.  However, it was one remark by Amamiya that caught the market’s attention.  This suggested that the BoJ could raise rates before the 2% CPI inflation target was hit.”

“For months, BoJ Governor Kuroda has been pushing back on market speculation that the BoJ may consider backing out of its huge QQE programme in the foreseeable future, not least to avoid some of the side effects of the policy. For years, Kuroda has referred to the need to change the mind-set of the Japanese consumer who continues to perceived little risk of inflation.  This was a primary reason that the BoJ set a price stability target at 2% y/y in 2013.  It is also why in September 2016 the Bank introduced a commitment to overshoot its inflation target.”

“Over the coming weeks, it is very likely that Kuroda will again re-inforce his dovish credentials and play down any risk of a rate hike before the 2% CPI inflation rate is hit. Yesterday the BoJ released its summary of opinions at the March 8 and 9 policy meeting.  These remained overwhelming dovish with several members echoing the view that “there is no change in the judgment that it is necessary to continue pursuing powerful monetary easing with persistence so that highly accommodative financial conditions are maintained”.  That said, in answer to prevailing speculation in the market that the BoJ will respond to strong economic growth by paring back QQE, there is a sense within the committee that communication is needed regarding future normalisation of policy.”

“One member stressed that “the Bank needs to explain to market participants so that they can fully understand that "normalization" is still in the process of monetary accommodation and completely different from monetary tightening, which aims at reducing the positive output gap. Such explanation will also be beneficial in smoothly proceeding with "normalization" in the future.”

“It remains our view that the BoJ will be one of the last G10 central banks to start the process of policy normalisation. Despite strong growth in Japan, there is little sign that the 2% inflation target is in view and the fact that the JPY is the second best performing G10 currency (after the NOK) in the year to date which act as a fresh suppressant on inflationary forces.”

“While Kuroda can be expected to keep reiterating his commitment to QQE in the coming months, the JPY is likely to pay only limited attention. Not only will strong Japanese growth data likely ensure that the market retains a degree of scepticism with respect to Kuroda’s reassurances, but as a safe haven the JPY will often show greater sensitivity to political events.  Due to its safe haven properties, the current scandal involving Japan’s Ministry of Finance has not had any significant impact on the JPY.  This week, however, safe haven demand has been lessened on reports from Japan’s Trade Minister Seko that it is highly likely that the country will secure some exemptions from US trade tariffs.”

“Despite our dovish outlook for BoJ policy, concerns about the impact on global growth from protectionism and a more hawkish Fed are likely to keep the tone of the JPY relatively firm. We see USD/JPY holding around the 107.00 area on a 3 mth view.”