BoJ preview: policy on hold, could be upbeat on export growth, gloomy on inflation

The Bank of Japan (BOJ) convenes on 26-27th April for their monetary policy meeting and is expected to announce their decision at the end of the two-day meeting.

In addition to the policy statement, we will also get the quarterly output report.

Before we discuss, what one can expect from the BOJ, the following points are worth noting-

Peak inflation - Japanese inflation did rise in February, with core rising for a second straight month. However, that could be inflation top in the medium-term as oil prices are fast losing height. Furthermore, there is growing evidence that inflation may have peaked out in the advanced world.

Trump Trade fades - Trump trade/Trumpflation has run out of steam. This has two ramifications - decline in inflation expectations and a strong Yen (due to risk-off and weak treasury yields). The unwinding of the trump trade could gather pace if the President fails to impress the markets today with his tax cut announcements.

Geopolitical uncertainty - Tensions between US and Russia over Syria, the US and China over North Korea may have ebbed for now, but could heat up any time.

Yen strength - The Japanese Yen has strengthened approximately 6.5% from its December low of 118.66 per US dollar.

Bond markets

• US treasury yields are on the back foot - If we ignore the rally seen this week, then the 10-year treasury appears to be in a downturn. The yield confirmed a double top bearish reversal pattern last week, thereby opening doors for a sell-off to 2.00%. That’s a 30bps drop from the current level of 2.30% and could lead to another round of Yen rally. It also indicates the Japanese yields no longer face a sharp upward pressure due to jump in the Treasury yields.
• Japanese 10-yr yield fell below zero earlier this month for the first time in five months.

Hence, the BOJ has plenty room to keep the yield curve control target unchanged.

Domestic positive - Japanese exports grew at the fastest rate in more than two years in March. Exports rose 12 percent from a year earlier, Imports jumped 15.8 percent (median estimate 10 percent); the biggest gain in more than three years.

What to expect of BOJ?

Status quo policy - The BOJ is expected to keep the monetary policy intact by a majority vote. It is likely to retain its QE guideline for base money supply of JPY 80 trillion. The bond market liquidity is a cause of concern, but the bank is unlikely to talk about it.

Downward revision of core inflation - BOJ has been widely expected to further dial back their core inflation/inflation less fresh food forecast from their current annualised 1.5% figure for 2017. The central bank is likely to keep the GDP forecasts largely unchanged.

May express worry about strong Yen - The Yen 6% appreciation in the Yen could slowly eat into Japanese exports and weigh over inflation in the near future. Hence, the BOJ may attempt verbal jawboning of the currency, although success is not guaranteed.

To reiterate QE will continue for some time: The bank is likely to squash taper talk by reiterating that QE will continue for some time.

What to expect of USD/JPY?

USD/JPY remains at the mercy of what happens in the US and on the global front unless the BOJ shocks market in some way, although the probability of such an event is very low.

Daily chart

Monday’s bullish candle and a close above 110.62 (23.6% fib retracement of 118.66-108.13), coupled with a breach of the falling trendline on RSI suggests the doors are open for a test and possibly a break above 111.82 (50-DMA) and a rise to 113.40 (100-DMA). Note the 50-DMA and 100-DMA have topped out.

The bullish view goes well with the fact that we have a large inverse head and shoulders pattern on the monthly chart and the current month candle shows a long tail (suggesting dip demand) and a sharp recovery from the sub-monthly 50-MA line. Also take note of the fact that the monthly 50-MA has bottomed out. 

Monthly chart