BOJ Preview: Snubbing Rate Hikes

The BOJ is expected to remain an outlier among central banks, maintaining a dovish stance and outlook despite rising inflation globally.

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The unique situation in Japan

While most other central banks are fighting burgeoning inflation, the BOJ has the opposite problem. The latest core CPI change came in at a negative 1.1%, the lowest since the 2008 financial crisis. Headline CPI is just 0.1%. The BOJ continues to fight its chronic problem of inflation just not growing to anywhere near the target.

Japan's experience with the pandemic was quite different from the rest of the world, with a slow rise in cases a year later than in most other countries. Japan didn't resort to the level of monetary expansion that other nations did - in part, because the BOJ was already at an extraordinary level.

There isn't much more to be done

As the Fed finally moved to raise rates, the yield differential between the dollar and yen is finally starting to widen. Since the start of the month, the Japanese currency has weakened quite a bit, resuming a trend through most of the year. The weaker currency could help increase inflation, and relieve some of the pressure on the BOJ.

Therefore, the BOJ is expected to keep its policy exactly as is, with a -0.1% interest rate target, yield curve control, and unlimited bond purchases. The last meeting's effective increase in bond buying is seen as a signal that accommodative policy is here to stay, and there won't be many changes in the coming months.

So, the market reaction could be quite muted, as the expectations have already been priced in. Kuroda's extensive press conference after the meeting could be the focal point, as investors try to understand how much depreciation in the yen the BOJ might be looking for.

USD/JPY hits 6-year record

USD/JPY hit a 6-year high earlier on Thursday. The FX pair gained more than 3.50% in March alone. A weekly close above 118.69 would increase investor appetite for higher prices.

The first major resistance would be the round 120.00 level. Above there, 121.29 becomes a hurdle and it could offer some correction. However, at this pace 125 would be no surprise over the longer term.
Inversely, major support can be observed at 116.95. In the interim, the weekly open at 117.26 could provide some short-term rejection. Both the weekly and monthly bars hint at a breakout though, and prices could continue to move higher.

Source: Spreadex trading platform

Key takeaways

BOJ is expected to remain dovish for the foreseeable future as CPI inflation remains negative. With the Fed having officially started its hiking cycle, USDJPY is projected to rise as the yield differential between the dollar and the yen widens.

Investors should not expect hawkish statements or major moves as the event is largely priced in. Instead, the focus should shift to Kuroda’s remarks around bond-buying to get a feel about BOJ’s plans to reduce accommodation.