It continues to be an uneventful week for USD/JPY. In Thursday’s North American session, the pair is down 0.9% and is trading at 111.30. On the release front, US unemployment claims rose to 241 thousand, matching the forecast. Later in the day, Japan releases Flash Manufacturing PMI, which is expected to improve to 53.4 points. On Friday, the US publishes New Home Sales.
Recent statements from the Bank of Japan indicate that when it comes to monetary policy, markets can expect more of the same. BoJ Governor Haruhiko Kuroda has insisted that the bank’s ultra-loose policy would continue until inflation has reached the 2% target. Although the bank shows no signs of exiting its quantitative easing scheme, the BoJ has reduced its purchase of bonds. If this continues, bond purchases could slow to JPY 60 billion/year, down from the current 80 billion/year. In the April rate statement, the BoJ was more upbeat in its economic appraisal. This was an acknowledgement of a stronger Japanese economy, which grew at annualized rate of 1.0% in the first quarter, as exports and consumer spending strengthened. On Wednesday, the BoJ released the minutes of the April meeting. Policymakers noted that under the bank’s asset-purchase program, the amount of government debt purchases would fluctuate, but that this did not pose a problem. The minutes also noted that members were optimistic about exports and industrial production.
The Federal Reserve has surprised the markets with its hawkish stance, as underscored by its rate statement. The statement mentioned that the Fed plans to reduce its balance sheet later in 2017, although it did not provide further specifics. The balance sheet has ballooned to $4.5 trillion, which accumulated after the 2008 financial crisis, when the Fed went on a bond-buying spree to stimulate the economy. The reduction will be gradual, but still marks an important change in direction for the central bank. On Wednesday, FOMC member Patrick Harker said that he was in favor of the reduction commencing in September. The Fed has hinted at one more rate hike in the second half of 2017, and the markets have circled December as the most likely date for a rate move. The CME Group has pegged the odds of a September hike at just 13%, compared to 18% a week ago. However, the odds for a December increase are at 49%, and this could increase if Fed policymakers continue to wax positive about the economy.
