After months of yen appreciation, the BOJ’s new policy measures initially saw weakness on the yen, however this quickly turned as a result of risk aversion with the USDJPY falling over 1000 pips since the January 29 high. Risk sentiment has been improving over recent sessions and as such USDJPY is now almost 300 pips off of its lows and with plenty more room to the upside should risk sentiment continue to improve. This is being further supported by recent USD strength with expectations for a Fed hike this year increasing significantly.
JPY Analysis
Interest Rate
Overnight Target Rate: 0.10%
Last Change: December 19, 2008 (0.30%)
Bank reserves above threshold: -0.10%
Expected Future Change: No imminent change expected
Quantitative Easing: ¥80 trillion (~$660 billion) per annum
Next Rate Decision: March 15
Inflation
Inflation Target: 2%
Period: Year ending February 29
Tokyo CPI (All Items): 0.1% Prior: -0.3%
Tokyo CPI (Ex-Food & Energy): 0.5% Prior: 0.4%
Tokyo-area CPI Ex-Food & Energy
Period: Year ending January 31
Nationwide CPI (All Items): 0.0% Prior: 0.2%
Nationwide CPI (Ex-Food & Energy): 0.7% Prior: 0.8%
BOJ Core: 1.1% Prior: 1.3%
Next Release: March 25
Employment
Period: January
Unemployment Rate: 3.2% Prior: 3.3%
Next Release: March 28
Growth
Period: Q3 (annualised)
Revised GDP: 1.00% Expected: 0.10%
Next Release (Q4 Preliminary): March 8
Despite fresh policy easing from the BOJ, the yen has seen broad based strength on the back of risk off sentiment that has sent safe havens flows pouring into the currency. For the week beginning 08 February, the yen continued to be the haven currency of choice, even gaining on other “safe” currencies such as the CHF (-1.7%) and EUR (-2.24%), according to data provided by Oanda. The USD tumbled over 3% for the same week as decreasing bets for a Fed rate hike in 2016 magnified the decline. This has sparked fresh speculation that the BOJ could be forced to act yet again in order to stem the increasing yen strength.
On January 29 the Bank of Japan eased monetary policy further by announcing the implementation of negative interest rates of -0.1% on reserves above a certain threshold that financial institutions park at the central bank. In a three-tiered approach, balances below this threshold will either be charged either zero percent interest or 0.1%, which is the overnight target rate and has remained unchanged since 2008. By charging banks to keep excess reserves at the central bank, the BOJ incentivises these institutions to hold cash and strive to lend it out, which should stimulate the credit cycle and boost the economy and inflation.
In the statement, the BOJ affirmed they will be prepared to lower rates further if necessary. The size of annual bond purchases for the QE program remained unchanged, however the Bank indicated that there is no limitation to increasing the program if needed. The Bank also extended its forecast for inflation to reach 2%, to around the end of 2017. These policy changes come only one month after the BOJ decided to extend the duration of the Japanese government bonds (JGBs) it buys, from 10 to 12 years, from 2016, and set up a 300-billion-yen fund to buy exchange-traded funds (ETFs) that specifically target firms actively spending on capital expenditure and wages. With underlying price trends failing to move higher, the Bank has had to take these measures in an attempt to stimulate the economy. So long as inflation remains subdued, the BOJ may have to consider further easing measures.
Inflation in Japan remains subdued and of major concern to the BOJ. Headline inflation has been severely affected by the decline in oil prices and as such the BOJ are not particularly focussed on this measure. Tokyo-area CPI excluding food & energy for February rose by 0.5% y/y, above expectations and the prior reading of 0.4%. For the month, core prices rose by 0.2% This preliminary data for the Ku-area of Tokyo comes one month ahead of national data and can therefore be seen as a leading indicator. Nationwide CPI excluding food & energy for January rose 0.70% y/y, inline with expectations yet lower than last months print of 0.8%. For the month, core prices fell -0.1%. The BOJ’ own measure, which excludes fresh food & energy, rose 1.1% for the year ending January 31, below expectations of 1.2% and last months reading of 1.3%. This suggests that the BOJ see the underlying price uptrend as understated by the official statistics bureau release. According to their own metric, prices need only rise another 0.9% to reach target. With inflation in Japan remaining stubbornly low and no sign of inflation picking up anytime soon the BoJ’s easing bias will remain in place for the foreseeable future with further easing by the BoJ remaining a distinct possibility
