Bank of Japan preview: policy stance expected to remain

BoJ expected to maintain accommodative monetary policy stance

Consensus expectations point to the BoJ’s policy stance being largely unchanged in the upcoming meeting. This includes keeping in place its target of -0.1% for short-term rates and 0% for the 10-year bond yield, under its negative interest rate policy (NIRP) and yield curve control (YCC). The upper limit of ETF purchases may stay at about 12 trillion yen, as a market-stabilising measure in the event of unwanted volatility.

Although Japan’s core inflation has been presenting smaller decline year-on-year (YoY) over the past four months, April’s figure of -0.1% remains far below the central bank’s inflation target of 2%. This suggests that accommodative monetary policies are set to remain for the foreseeable future, as the BoJ expects core consumer inflation to hit 0.8% in 2022 and 1.0% in 2023. Inflation has barely picked up in the country despite supply bottlenecks and higher commodity prices, raising inflation concerns in other major economies.

Risks to the economic outlook may remain, despite declining Covid-19 cases in recent weeks. With just 4.3% of the population fully vaccinated, the upcoming Olympics, summer vacation and ongoing restrictions easing may pose increased risks of virus spreads ahead. Restrictions in place have particularly weighed on the recovery in the services sector, which is still trending in contractionary territory as domestic consumption cools.

Investors may be on watch in the upcoming meeting on whether the BoJ proceeds to extend the September deadline for its Covid-19 lending programme, a largely anticipated move based on estimates to support ongoing economic recovery. That said, its main policy levers are expected to remain on hold as the battle with the pandemic continues.

USD/JPY on hold ahead of FOMC meeting

The USD/JPY seems to be trading within an ascending channel pattern, with near-term uptrend denoted by higher price highs and higher price lows since April. US consumer inflation came in at its 13-year high for May but a fall in US 10-year yields in reaction suggests that the bond market is buying into the Fed’s stance of inflation being ‘transitory’. Lower yield differentials from softer Treasury rates may have resulted in the currency pair delivering muted action over the past week.

Ahead of the Federal Open Market Committee (FOMC) meeting on Wednesday, the movement of the currency pair lies in various conflicting factors. Discussion about tapering may potentially be brought up during the Fed meeting and any hawkish shift in policymakers’ stance may support the US dollar. However, the slightest mention of tapering may also potentially drive risk-off sentiment among investors, leading the yen higher in its role as a safe-haven asset. This makes the direction for the currency pair highly uncertain in the near-term.

That said, based on technical perspective, one may potentially trade the ascending channel pattern until a breakout in either direction occurs. Base support may be at 109.3, while resistance may be at 110.7 based on the lower and upper trendlines of the channel.