It’s amusing to watch, in the usual dark way. The mechanical bid for oil and stocks only makes more Fed action likely. It is now a “Fed call”. Doh!
However, the big news overnight was the BOJ. Nobody does Japanifaction like…well…Japan. Pantheon:
The BoJ doubles down on yield curve control, defying market speculation
No one expected a rate hike at today’s meeting, but chatter about the yen had grown to a roar as the currency has surged from around 118 to the dollar at the last meeting, to within touching distance of 130 in recent weeks. Governor Kuroda had even warned recently that the move was sharp enough to hurt businesses, a marked shift to his prior messaging that a weaker yen was an economic positive. With this in mind, a change to yield curve control (YCC) seemed possible, but it was not to be. The BoJ’s statement on monetary policy pledged to continue purchasing an unlimited amount of JGBs at 0.25%, as needed. Policymakers in fact doubled down, with the BoJ now set to buy every business day, in a sign of strong commitment to capping yields. The yen is 1.3% weaker against the dollar on the day, breaking through 130, at the time of writing.
The BoJ has also updated its economic outlook and projections. Growth rates were revised lower for FY2021 and FY 2022, thanks to Covid, the commodity price shock, and slowing external demand. FY2023, however, sees an upward revision as the economy rebounds. For now, however, risks to activity are skewed to the downside. Inflation, meanwhile, is projected to be “significantly higher” for FY2022, up to 1.9% from 1.1% at the previous forecast round, chiefly due to energy prices, with largely upside risk. Lower growth, higher inflation – Japan is under the same pressures as the rest of the world, it is just operating from a different starting point.
Today’s meeting sends a clear signal that the BoJ is focused on the economy, not the currency. The risks to inflation might seem at odds with this stance, but full year inflation is still projected to come in under target, and the temporary increase—inflation is projected to drop back to 1.1% the following year—is clearly linked by the BoJ to energy prices. Monetary policy will remain on its current settings “as long as it is necessary for maintaining [the 2% target] in a stable manner”, and energy-driven inflation is not stable. The BoJ assesses that the output gap remains in negative territory, and will return to positive territory only in the second half of the fiscal year. By implication, it is only after that time that inflation is likely to start increasing in a “sustainable” fashion. We will be waiting a long time for a material shift in policy.
We are still of the view that yen weakness, at this point, constitutes a material drag on economic activity, by eroding disposable incomes and pushing up costs for firms, while offering less of a lift to exports given waning external demand. A shift in YCC still seems plausible this year, but the BoJ will not be the first mover; Governor Kuroda has in the past made it clear that FX policy is the preserve of the Ministry of Finance. A shift in YCC would therefore occur only after the MoF has begun intervention. Today’s meeting reduces the likelihood of such a shift, but it remains our base case.
Our chart shows the evolution of the BoJ’s inflation forecasts. While inflation is expected to be sharply higher in FY2022, it is important to note that the BoJ views this as transitory, given the pullback the following year
It was this that sank JPY,CNY and AUD. They are all now trading as a free-falling bloc of DXY losers.
Major EM and commodity accidents always follow.
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