Despite the quiet start of Governor Ueda’s term, there are some expectations being built up for the BoJ’s July meeting. This week’s data prints could, on the margin, tip the balance in favour of some sort of policy announcement at the next meeting. Will these developments, though, allow the yen to finally record some gains against the pound?
What has been happening lately?
The continued underperformance of the yen against major currencies is getting increased airtime. With the outright levels close to multi-year highs, the pace of the recent price action is flashing red. After years of strong cooperation between the then PM Abe and Governor Kuroda, the current situation is clearly a test of the developing relationship of the new leadership at the BoJ and the Japanese finance ministry. While the latter is performing the actual intervention, it is known that the BoJ has an active role in the discussion.
Despite the negative implications on the business environment, the weaker yen is helping the BoJ in its inflation-creation challenge. Imported inflation has helped the national CPI to remain above 3% for the past 10 months. BoJ members have repeatedly commented on the nature of current inflation – i.e. supply side pressures – and the need for inflation to become a demand issue. Until this happens though, they are happy to accept the higher CPI prints and hope that these elevated inflation figures become imprinted on the public’s mind.
The BoJ would clearly love to start scaling back its ample monetary policy stance by curtailing its yield curve framework, and eventually announcing a rate increase. This is also an alternative way of supporting the ailing currency and avoiding a costly intervention. In addition, currency interventions are strongly criticized by other G20 members although Japan, amidst its decade-long fight against deflation, is usually not scolded. However, the BoJ needs sufficient evidence to support a policy announcement. The recent Summary of Opinions opened the door to a likely announcement at the July meeting, but data prints and the inflation outlook will eventually dictate BoJ’s reaction.
Retail sales and consumer confidence in the spotlight
On Thursday morning, we will get two important consumer sector indicators. Looking at the details of the stellar GDP print for Q1, private consumption was again lagging behind other sectors, despite the recent positive run of both the retail sales figures and consumer confidence. Another strong set of data this week would probably cement the recent strength in consumer spending, and create hopes for a long-lasting positive trend in this sector after the stronger wage agreements in April 2023.
Tokyo CPI ready to leapfrog
More importantly, on Friday we will get the June Tokyo headline and core CPI figures, an early preview of the current national inflation pressures. The market is looking for a sizeable increase in both indicators with the core index, excluding food and energy, seen jumping for the first time above 4%. Confirmation of these forecasts will most likely have a ripple effect across the market and give a significant boost to BoJ expectations.
Pound/yen at 7.5-year high
The unexpected strength of the pound during 2023, despite the BoE’s muted monetary policy response, and the continued yen weakness seen across the board has pushed the pound/yen pair to a 7.5-year high. The overall technical picture is not positive for the yen, but there are some early rally-exhaustion signs in the momentum indicators. Naturally, a stronger set of data this week has the potential to cause a small correction in this pair, which could gain further traction if the April 9, 2001 high of 181.42 is easily broken.
