BoJ still hoping inflation expectations will rise - MUFG

Lee Hardman, Currency Analyst at MUFG, suggests that the BoJ’s monetary policy decision has also failed so far to trigger USD/JPY to break out of its recent range between the 100.00 and 105.00-levels.

Key Quotes

“As the pair is trading towards the lower end of the range, it has prompted a predictable pick up in verbal intervention from the Japanese authorities. Chief Cabinet Secretary Suga has stated overnight that he is concerned about excessively sensitive FX moves and will make needed response if current FX situation continues to counter speculative yen buying.

The BoJ’s attempt to make their monetary easing more sustainable and credible by shifting to yield curve control rather focusing entirely on the quantity of monetary base and asset purchase expansion is having limited impact on the yen in the near-term. The BoJ is still hoping that inflation expectations in Japan will rebound and lower real yields to offer more support for growth and inflation. However, even with the strengthened commitment to target an inflation overshoot it is difficult to see why the policy announcement should trigger an immediate rise in inflation expectations. The initial lack of yen weakness following the policy announcement highlights that the market remains similarly sceptical that inflation will even return to their 2.0% target never mind overshoot in the future.

However if in the future actual and expected inflation regain more upward momentum, the BoJ’s new commitments to hold down long-term nominal yields and target an inflation overshoot could then prove more powerful at weakening the yen.”