The Japanese economy continues to suffer from China’s economic slowdown and Sino-American trade tensions. So the Bank of Japan voted 7-2 to maintain its policy balance rate unchanged at -0.10% while maintaining its target for 10-year bond yields along zero and annual bond purchases at JPY 80 trillion ($716.32 billion). We do not see any improvement coming. The US-China Trump-Xi meeting initially planned for mid-March has been postponed for 2-4 weeks. Until then, news will be foggy, and Chinese stimulus policies will not kick in until Q3. Currently trading at 111.65, USD/JPY is heading along 111.45 short-term.
Economic headwinds forced the BoJ to revise exports and production downward. January exports dropped -9% (prior: -5.80%), their lowest in three years and the third consecutive drop while imports have rebounded 0.50% (prior: -2.20%) in the same period. There was an unexpected pick up in the January current account balance of JPY 600.4 billion (prior: JPY 452.8 billion) amid a sharp rise in investment income due to an expansion phase in financial markets, yet the drop in January machine orders by 5.40% suggests further slowdown in Q1. BoJ’s change of language from “increasing as a trend” to “recently showed some weakness” shows the situation is not expected to improve until Q3. Assumptions of 2% inflation have now become wishful thinking.