BOJ Preview

The BOJ is expected to keep policy steady despite growing concern over a weaker yen; focus on possible guidance from Kuroda.

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BOJ sets its own path

The BOJ is facing a problem, which is getting worse as the rest of the world raises rates. The bank has long insisted that it doesn't pay attention to the exchange rate, and is looking to maintain a loose monetary policy to support a nascent recovery. But those low rates are weakening the yen to the point that households and businesses are seeing substantial increases in prices resulting from imports.

For a central bank long struggling to raise rates, it might be seen as a positive development that inflation finally popped over its 2.0% target. But that wasn't in the core rate, and largely attributed to rising costs in fuel and food, both elements that Japan must import. In other words, it's not the healthy broad-based inflation driven by economic growth, but higher prices driven by diverging monetary policy.

Where to go from here

Last week, Governor Kuroda had to backtrack on a statement issued on Twitter, where he suggested that Japanese people were getting used to higher prices. The episode suggests that the policy of yen weakness could be losing popular support.

Although analysts generally agree that the BOJ is likely to stick to keeping rates low, further deterioration in the yen could prompt a rethink. And given the latest episode, analysts are going to pay close attention to Kuroda's presser to see if there is any change in the attitude towards ultra-low rates and whether there is any hint of concern for the exchange rate.

One last point on risk: reward. The yen is now so historically weak, and the BOJ policy so clearly at odds with the Row that a ‘shock’ or even unforced change of policy is becoming more likely. This is perhaps being priced in via the latest rebound in the yen. Were such a change to happen, we could expect a yen record (EUR/JPY weakness) to really take hold.

EUR/JPY outlook

EUR/JPY has approached the 140.00 round support as of Thursday after a bearish divergence signal was followed by a price reversal from 144.25 down. The pair had been on an uptrend since its plunge to 125.00 on March 7, with its first upward leg off 125.00 pulling back from 140.00 to 133.00. The second leg printed the multi-year high. If prices fall outside the lower channel, revisiting 133.00 could be next. Inversely, holding firm against bearish price action will increase the chances of recapturing the top but 141.75 is major resistance.

Source: Spreadexd trading platform

Key takeaways

The BOJ is struggling with rising prices and raising rates, but the root cause is not inflation caused by growth but by diverging monetary policy. Governor Kuroda hinted that policies of yen weakness might be losing support, and analysts are now likely paying close attention to the post-BOJ presser.