BoJ Preview: Outlook to signal policy pivot?

The Bank of Japan could be about to use its quarterly outlook to signal a historic policy pivot as Japan starts to experience long-lost inflation. 

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MARKETS FOCUS ON QUARTERLY OUTLOOK

The BoJ meets to discuss policy early Tuesday, but 'policy' is unlikely to be the major event as the consensus among analysts is for no change. This has been evident since December in the price of USD/JPY, especially when accounting for Fed's policy-tightening narrative, as the pair was trading at a 5-year high only a few days ago. 

However, since then, markets seem to be influenced by speculation that the BoJ's quarterly outlook will see a revision on inflation and growth expectations. If that's so, it could be a precursor to a shift in the BoJ's yield curve control (YCC) regime.  

Japan's decades-long fight against low inflation might finally be coming to an end. Last quarter, inflation was positive, suggesting that Japan is not immune from global price pressures. In his previous press conference, Governor Kuroda acknowledged that inflation was increasing. So, adjusting the outlook for prices wouldn't come as too much of a surprise to the markets. Following that, if Governor Kuroda exhibits a positive tone during his typical marathon press conference, the market could move further.

CPI AND GDP REVISIONS

The quarterly report should determine the market's reaction to the BoJ. Currently, the BoJ expects inflation to be 0.9% this year. The expectation is that they will raise that outlook. The higher the forecast, the more hawkish the implications for future policy, and the sooner the market can price in rate hikes. There is a weak consensus that the inflation outlook will be raised to 1.0%, which is a big deal for Japan, despite being far from the central bank’s 2.0% target.

The other factor to pay attention to is the BoJ's GDP outlook. The Japanese central bank does try to support the economy, but that is seen as a secondary concern to maintaining price stability. The lack of economic growth is seen as the leading cause of slow inflation. Contrary to the consensus that the BoJ will raise its inflation outlook, there is also a belief among some analysts that it will cut its GDP forecast. The bigger the cut to the Japanese economic growth outlook, the less likely it is that the BoJ will change its monetary policy any time soon.

IMPLICATIONS FOR USD/JPY 

The dollar-yen pair has found support at the 38% Fibonacci retracement of the rally since September as well as parallel channel support, but this is the first decent bounce seen since 116.3. The trend is cautiously higher but a bearish RSI divergence adds to the downside risk.

Source: SpreadEx

TAKEAWAYS

If the BOJ outlook is hawkish and Kuroda acknowledges rising inflation, the recent bounce could be short-lived with USD/JPY reversing its course again to head towards 112.7 and 111.8, both of which are critical Fibonacci levels.

If, however, Kuroda reiterates an accommodative policy path based on a potential downward GDP revision, USDJPY could take a breather and find resistance higher at 114.6 and perhaps 115.50.