BOJ preview – much ado about nothing

IGTV’s Victoria Scholar speaks to Marc Ostwald, global strategist at ADM ISI, about what to expect from the Bank of Japan’s (BoJ's) rate decision on Friday. 

The apparent lack of inflation growth continues to bind the hands of the BoJ and the recent slowdown in growth which further cements this perception, leaving markets to be directed by the slew of events surrounding the BoJ instead.

Coming at the heels of the historic US-North Korean summit and the central bank meetings in both the US and European Union, the BoJ decision is one that is expected to pale in comparison. Not to mention, the rhetoric from European Central Bank members in the previous week had certainly elevated the ECB into the ranks of the Fed in importance with plans of their widely anticipated bond-purchase exit strategy. The BoJ in the respect of advanced economies’ central banks once again lag behind in being the most dovish of which.

Indeed, an examination of the latest inflation numbers reinforces this imperative with the country’s core CPI a far cry from target at 0.7% year-on-year based on the latest April’s reading. The timeline in achieving the target itself, previously set at ‘around fiscal 2019’, faced abandonment in April’s outlook. With a lack of quarterly outlook in the June meeting, the market will likely look to the central bank for clarification on their outlook via their statement and governor Haruhiko Kuroda’s press conference in the upcoming meeting. Notably, the latest Q1 GDP numbers had been revised further to a contraction of 0.6% quarter-on-quarter, breaking the growth streak that lasted for eight quarters and providing the central bank with little ammunition to put further monetary policy changes onto the drawing board.

With the above being said, the expectation for adjustments of the central bank’s yield curve control (YCC) framework into the end of the year does still have its place in the market with developments to be monitored. The shorter-term movements for the yen crosses, and thereby the equity market, could instead find its path guided by the likes of the Fed and the ECB. This follows the reaction, or the lack thereof, towards the Trump-Kim summit where a work-in-progress outcome had been derived from the historic meeting.

USD/JPY

Looking at the USD/JPY pair, prices threaten the transition towards a horizontal consolidation from the current longer-term downtrend. Look to a breakout on either ends of the $109 handle or above the 61.8% retracement level of $110.63 for inkling of price momentum.