Bank of Japan review - holding still in 2019

The details

The January BoJ meeting saw short-term interest rates kept at -0.1 percent, just as the 10-year Japanese Government Bond (JGB) yield target was maintained at around zero percent. The pledge to keep JGBs purchase at a steady rate had also remain unchanged in the January meeting, altogether yielding no change within markets or JPY pairs.

Meanwhile, expectations for the revision of inflation forecasts had been met with the lowering of fiscal 2018 core CPI to 0.8% from 0.9% and 2019 core CPI to 0.9% from 1.4% in October 2018, with the lower oil prices blamed for the development. Quarterly report from the BoJ had also noted the usual risks within markets, including the most talked about US-China trade friction. That said, the BoJ had also held on to the positive outlook towards growth, expecting it to remain steady even in the face of the consumption tax hike in October this year. While fiscal 2018 GDP for the period ending March this year had been revised down to 0.9% from 1.4%, fiscal 2019 GDP forecast had simultaneously been lifted to 0.9% from 0.8% previously.

The inflation conundrum

The key takeaway from the latest meeting had perhaps been the wavering conviction of achieving the bank’s 2% target. One would note that the latest core CPI had arrived at 0.7% year-on-year, slowing to the weakest rate since May 2018. Certainly, BoJ governor Haruhiko Kuroda had emphasized in the press conference that the target will eventually be reached, but the timing had been one to elude the central bankers time and time again. The significant strengthening of the yen since December and the dependency on oil prices to lead inflation growth will also unlikely induce changes in outlook in the near term. This is particularly given the likelihood for crude oil prices to keep to a consolidation trend caught between OPEC and co.’s support alongside weaker demand expectations on the back of slowing global growth momentum.

USD/JPY externally driven

In terms of the implications, BoJ governor Kuroda’s emphasis on achieving inflation target prior to normalizing monetary policy keeps the hands tied for the central bank. This stagnant outlook for the central bank’s course may well keep the relevancy of upcoming meetings to a minimum for markets, allowing external forces to become the driver for its currency among others.

Look to the slew of events, ranging from the US-China trade talks, US earnings and Fed meeting in the coming week to sway USD/JPY and Japanese markets.