BOJ Preview: Policy paralysis could send USD/JPY down
|- The BOJ is set to leave its policy unchanged at the sixth anniversary of its QQE program.
- There is little maneuvering space for the central bank.
- The Japanese yen could strength on the inability to act.
The Bank of Japan announces its rate decision and releases its Outlook for Economic Activity and Prices in the early hours of Thursday, April 25th. BOJ Governor Haruhiko Kuroda will meet the press at the wake of the European session.
The Bank of Japan is stuck between a rock and a hard place. Inflation remains stubbornly low despite the Bank's best efforts.
The efforts, the backlash, and the failure
Kuroda celebrates six years at the helm of the Tokyo-based institution. Back in April 2013, he shocked the financial world by announcing a massive bond-buying program called Quantitative and Qualitative Easing (QQE). The announcement sent the yen plunging. So did another round of easing in late 2014.
The BOJ went forward and introduced negative interest rates of -0.10% in January 2016. They continued with pledging to keep ten-year bond yields around 0% in September 2016.
These two last steps have already caused a backlash. Japanese banks' profits are suffering. They have been complaining for a long time and putting pressure on the Bank and the government. The BOJ somewhat eased its policy on the 10-year yields, but the negative interest rate is still painful.
And despite hurting the banks, the most recent Core Consumer Price Index beat expectations to the upside by hitting 0.8% y/y. Nevertheless, this is a far cry from its 2% target.
No room to act - USD/JPY
The current situation leaves the BOJ little wiggle room to act. In addition to leaving its policy unchanged, the central bank will also publish its quarterly outlook. The document is set to include yet another pushback as to when the inflation target will be reached. They have been pushing back the elusive goal into the future over and over again.
In the press conference, Kuroda will likely be asked about the efficiency of his policy, the chances of ever achieving its policy, and if any additional measures are due. Kuroda is unlikely to provide satisfactory answers.
Without any pleasing answers, markets may begin betting against the BOJ. If it is unable to act to push inflation higher and the yen lower, there may be room to buy the safe-haven currency.
After all, the world is slowing down and there are a plethora of geopolitical troubles from North Korea to Brexit.
Conclusion
The BOJ is set to leave its ultra-loose yet unsuccessful policy unchanged, pushing back the date it hopes to hit the 2% core inflation target. On this background, investors may buy the currency, assuming the BOJ has no more tools in the shed and/or does not want to use them.
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