BoJ had no choice than to hold its monetary policy unchanged for now. The base rate has been kept on hold at -0.1% and the central bank will continue to focus on maintaining the 10-year yield to 0 by purchasing massive amounts of Government bonds (80 trillion yen annually).
The BoJ seems definitely stuck in its very loose monetary policy as deflationary pressures are still important.
Some recent fundamental data showed improvement in Japan’s economy. Japan’s demand has accelerated according to a report released last Wednesday and central bankers, once more, expect this demand to keep growing, in particular the foreign demand. Nonetheless the inflation is standing well below the target, and this has not changed for the past decade. CPI is currently standing at an annualised data of -0.4%.
Upside pressures on the currency remain but the BoJ cannot tighten its monetary policy or it would largely hurt its economy. The safe haven status is also one key issue, as whatever the state of Japan’s economy, investors would drive their money as soon as a risk-off sentiment arises.
We believe that Japan, in the medium-term, will try to expand the monetary policy divergence with the US in order to help reduce pressures on its currency. Yet, we consider that the US economy is overestimated and may trigger again inflow towards the Japanese yen. We reload bullish yen positions around 112 against the greenback.
By Arnaud Masset