Bank of Japan Under Pressure to Ease

The Japanese Yen Has Been Weaker Awaiting Action from the Central Bank

The Japanese currency has been on a rollercoaster ride in the past 2 years. The appointment of Prime Minister Shinzo Abe for his second term at the end of 2013 was a portent for things to come. Abe’s naming of Haruhiko Kuroda in early 2014 to head the Bank of Japan was the first step in his ambitious “Abenomics”. Through aggressive easing and a Halloween shock in 2014 and another stimulus round in 2015 the central bank has only been able to keep up with the volatile forex market. Economic shocks have worked against monetary policy decisions as the Yen is considered a safe haven. The central bank has battled to keep the Yen weaker in order to gain a competitive advantage to help the economy escape deflation.

The news of the British vote to leave the European Union put pressure on the BOJ and the government to come up with further stimulus as the Yen rapidly appreciated. The government has already put on hold plans to increase its sales tax putting growth ahead of fiscal responsibility for the time being. Abe announced this week a plan to spend as much as 28 trillion yen ($354 billion) in economic stimulus, but leaked documents show that the final amount could be much lower and lacking a new strategy.

The combination of a less dovish FOMC and uncertainty around the size of the stimulus plan have made the JPY rise ahead of the BOJ meeting. The Bank of Japan (BOJ) is under political pressure to act and although it has denied the use of helicopter money but there are still creative ways to offer the same stimulus under a different name. The BOJ will release its statement on Thursday, July 28 at midnight EDT and the central bank outlook report will be published at 1:00 am on Friday, July 29 EDT to be followed by a press conference.

The USD/JPY has lost 0.813 in the last 24 hours. The pair is trading at 104.85 ahead of the BOJ possible stimulus package. The market has brought some assumptions to what the next step will be for the central bank, only for BOJ officials to deny they will be heading that route. Things like 50 year bonds and helicopter money have been outright denied, which in itself does not mean they have no probability of showing up as part of the stimulus package if there is one.

Japanese Prime Minister Shinzo Abe has said almost a 6% of GDP size stimulus package is in the works. The central bank will be forced to take responsibility for some of that which is why there is high anticipation of action from the BOJ on Thursday and Friday. Failure to come up with something that meets the expectations both in the size and the duration could end up making the Japanese currency gain versus the U.S. dollar, derail the stock market and compromise exports as competitiveness erodes.

The JPY has shown increased volatility as the currency has swung according to market expectations. Analysts expect the central bank to announce a new round of QE, with the real question being how big and how will it be carried out. The JPY will be at the mercy at how big they BOJ goes on Friday more than what tools will be used to inject the stimulus.

Market events to watch this week:

Thursday, July 28
Midnight JPY Monetary Policy Statement
Friday, July 29
1:00 am JPY BOJ Outlook Report
Tentative JPY BOJ Press Conference
8:30 am CAD GDP m/m
8:30 am USD Advance GDP q/q

*All times EDT