4 Things to Remember When Trading the BOJ Statement

It will be the Bank of Japan’s turn to take center stage this week, as Governor Kuroda and his men will make their policy statement on Wednesday. Will they put on a good show like most of the major central banks did or will they disappoint? Here are some things to keep in mind if you’re planning to trade this event:

1. Weaker than expected Q4 2014 GDP

Fresh off the press in today’s Asian trading session is the Japanese GDP release, which showed that the economy expanded by 0.6% in Q4 2014. The good news is that this means Japan is officially out of a recession but the not-so-good news is that the actual figure came in weaker than the estimated 0.9% growth figure. To top it off, the previous reading was downgraded from -0.4% to -0.5%.

Components of the report reveal that growth was buoyed mostly by a pickup in exports while other sectors posted feeble gains. Household spending showed a bleak 0.3% uptick for the quarter while capital spending rose by merely 0.1% during the period.

2. Spending still hurting from the tax hike

As I’ve discussed in an earlier article on 3 Signs that the BOJ Might Need to Ease Again, consumers have still been unable to recover from the sales tax hike last year. Household spending and retail sales both chalked up much weaker than expected readings for December, even as price levels had been falling then.

Bear in mind that close to a year has passed since the Japanese government decided to increase the consumption tax from 5% to 8% in April 2014, leading to higher tax-inclusive prices of goods and discouraging consumers from spending. Even with the global downturn in inflation these days, Japanese consumers are still keeping their hands in their pockets!

3. Peer pressure from other central banks?

It’s no secret that a currency war seems to be brewing among most central banks, as some have resorted to policy easing in order to keep their respective currencies weak and stoke inflationary pressures. You see, a weaker local currency lowers its purchasing power, which means that consumers would have to pay higher prices for the same products, pushing inflation up.

Of course, as my nerdy buddy Isaac Newton stated, every action has an equal and opposite reaction. In the forex world, a weakening local currency means that other counter currencies become relatively stronger, which means that a central bank must be ready to step up its easing game if it wants to prevent its own currency from strengthening.

4. BOJ policymakers might stay optimistic

Despite the road bumps in the Japanese economy, BOJ policymakers have managed to stay optimistic so far. In their previous policy statement, they even upgraded their growth forecasts and said that the economy is rebounding.

In addition, policymakers mentioned that exports are picking up and that factory output is bottoming out. For them, the downturn in price levels is just a temporary glitch and that their longer-term view on inflation remains unchanged. Should they maintain this upbeat assessment and outlook this month, forex market watchers might refrain from pricing in additional BOJ stimulus before April and allow the Japanese yen to rally.