MNI STATE OF PLAY: BOJ To Stay Easy Despite Weak Yen, Yields

The Bank of Japan will keep easy conditions in place at its meeting this week even after the yen briefly crossed 135 to the dollar on Monday and after speculation of more aggressive hikes by the Federal Reserve forced the BOJ to increase planned bond purchases to defend its targeted yield range.

While the widening yield gap with U.S. rates has prompted the yen to dip around 15% against the dollar this year, fuelling cost-push inflation driven by imported energy that lifted CPI by 2.1% in April, policymakers do not expect increases in wages and prices to keep inflation sustainably at the 2% target. (See: MNI INSIGHT: Japan's Retail Price Hikes May Falter In 2023). This week, the BOJ could also cut its growth outlook even as the country emerges from pandemic curbs and reopens to tourism.

As a result, the BOJ is expected to continue to defend a 10-year yield range of -0.25% to +0.25% with a target of 0%, hold the short-term rate at -0.1% and continue annual exchange-traded fund purchases of around JPY12 trillion and J-REIT purchases around JPY180 billion.

FORWARD GUIDANCE

The BOJ board is also expected to maintain forward guidance for policy rates “to remain at their present or lower levels” while the output gap remains in negative territory and the economy continues to lag pre-pandemic levels. Exports and production have been hit by supply-chain problems with the BOJ looking to the Tankan business sentiment survey due out on July 1 for guidance.

Governor Haruhiko Kuroda on Monday said that the recent sharp yen fall above JPY135 was not good for the economy and there were rumblings last week in Japanese policy circles of potential action on the yen level, though coordinated FX intervention would rely on the Ministry of Finance to make any such decision.

Another agenda item for the BOJ is a special programme to support funding for smaller firms hit by pandemic curbs, which is set to expire at the end of September and which could come up in June for discussion ahead of a decision to extend, or not, at the July 20-21 meeting.

The BOJ board will review its medium-term economic growth and inflation rate forecasts in the quarterly Outlook Report at its July meeting.