The Bank of Japan meeting contained few surprises, although not only did they lower CPI forecasts as expected but also push back the timing for it to reach their 2% goal.
- BoJ keeps policy steady
- Short-term interest rate remains at -0.1%
- 10yr JGB target remains around 0% (7-2 vote)
- Time for hitting inflation of 2% is pushed back to around FY 2019
- Pledge to buy JGBs at annual pace of around Y80trn
The meeting went broadly as expected with policy remaining unchanged, with revisions to the outlook. Growth has been upgraded in 2017 and 2018 to 1.5%-1.8% (1.4%-1.6% in April) and 1.1%-1.5% (1.1% to 1.3% in April) respectively. Inflation has been downgraded once more for 2017 and 2018 yet, once again, they maintain 2% target is viable and achievable. The market reaction was a slight reduction for the Yen, although we expect this trend to continue over the coming months as Yen bears return to the table.
Japan’s trade increased by Y644.1bn in May which took the surplus to Y439.9. Whilst this is below expectations of Y484.7B, it did drag it out of April’s surplus of -Y204.2Bn. Gross exports increased to Y6.6trn, up 756.4bn from May, which annualised is 9.7% YoY (14.8% prior). Gross Imports increased to Y612trn, up by 112.3bn from May which sees the annual rate at 15.5% (17.8% prior). To the annoyance of the US, they provided the single largest portion of June’s surplus with the whole of Asia coming a close second. What this will do to trade relation with the US, only time will tell, but they should take note of the hostile meeting the US had with China overnight in which Trump hinted Steel tariffs may be just around the corner. Whilst exports to US currently outstrip imports from the US by a ratio of 1.61, Japan remains a long way off from what Trump would call a ‘fair deal’
USDJPY rebounded as expected, although the day’s range so far has been on the subdued side. If we are to see a repeat of positive data from the US tonight then this leaves potential for gains to continue and test the 112.23 high.
We provided an overview of Yen crosses yesterday and highlighted that downside momentum was waning, which left potential for a bullish wedge of some sorts to materialise. We printed a lower low overnight which makes the wedge from 112.86 stretched, but if we are to break above 112.23 then it warns of a deeper correction against the dominant trend. As the zone between the monthly pivot and 111.70 only tested the upper boundary, we see potential for resistance to break overnight and eventually run for the 112.86 high.
The bullish RSI divergence needs to be confirmed with a break of a prior swing (112.86), and its possible RSI has signalled this to be more likely by breaking its own prior swing in anticipation.
Quarterly Outlook Summary
- Economy is in gradual recovery
- Recent moves in CPI have been relatively weak
- Rise in medium to long term inflation expectations has been lagging somewhat
- Inflation expectations projected to rise as firms gradually raise wages
- There is uncertainty about overseas economies, which could pose downside risks
- CPI likely to continue uptrend, increase towards 2pc
- If trust in mid- to long-term fiscal policy declines this could increase uncertainty and raise long-term yields
- Projected rate of increase in CPI is lower mainly for the first half of the 3-year projection period in BoJ’s quarterly report
- Risks to the economy and prices are skewed to the downside
- There is risk that household inflation expectations could be slow to rise
- Momentum towards hitting price target is maintained but not yet sufficiently firm
- There are risk household inflation expectations could be slow to rise if CPI remains weak
- BoJ to make policy adjustment as appropriate with view to maintaining momentum towards achieving price target
