BOJ Preview: Raising its view on inflation, finally!

At its first monetary policy meeting of 2022, the Bank of Japan (BOJ) is unanimously expected to keep its policy settings at the conclusion of its two-day review on January 18.

However, the central bank is likely to ditch its long-held view on price risks, in light of rising inflationary pressures globally, which is arriving in Japan. The BOJ will also make revisions to its fiscal year 2022-2023 economic growth projections, as it publishes its quarterly outlook report next Tuesday.  

BOJ to ditch long-held view on price risks

The BOJ is seen keeping the benchmark policy rate steady at -10bps while maintaining its pledge to buy J-REITS at an annual pace of up to JPY180 bln.

The bank’s quarterly report on prices and growth outlook will hold the maximum importance, especially after Governor Haruhiko Kuroda recently conceded, the Consumer Price Index (CPI) is likely to gradually increase as a trend, reflecting rising energy prices.

According to a summary of opinions at their December meeting, policymakers discussed recent rising inflationary pressures that could prompt them to change their view that the country remains vulnerable to the risk of deflation.

Confirming the same, the BOJ board is likely to debate if it’s still valid to say price risks are “skewed to the downside,” which has been the central bank’s view since October 2014, Bloomberg reported earlier this month, citing people familiar with the matter.

That said, the central bank could raise its forecast for FY 2021-2022 inflation from the current 0.9% to 1% or higher, mainly in response to the supply-chain disruptions triggered by the pandemic.

Any shift in the risk assessment of prices, however, would not be considered a hint that the BOJ is moving toward policy normalization, as inflation is a distant dream from the bank’s 2% target.

Amid a likely upward revision to the price forecast, the BOJ may trim its growth outlook of 3.4% for this fiscal year ending in March.

The bank is seen upgrading the FY 2022-2023 growth estimate from the current 2.9% amid PM Fumio Kishida’s economic package and an expected pickup in consumer spending and output.

Despite the upbeat economic outlook for the next fiscal year, the BOJ could refrain from deciding on continuing the current easing measures, as the Omicron covid wave is brewing trouble once again in Japan. Tokyo confirmed on Wednesday that it is increasing its coronavirus alert level.

Although some sources said that the policymakers are debating how soon they can start telegraphing an eventual interest rate hike, which could come even before inflation hits the bank's 2% target, according to a recent story carried by Reuters. 

USD/JPY probable scenarios

USD/JPY has charted out a bearish wedge on the daily sticks just a few days ahead of the BOJ announcements. The downside break in the major could be mainly attributed to the broad decline in the US dollar and the Treasury yields, despite the hawkish Fed outlook.

Therefore, the reaction to the BOJ decision is likely to remain brief, as the prevalent risk tone combined with the yields and the dollar valuations will likely remain the main drivers for the currency pair.

Technically, the risks remain skewed to the downside for USD/JPY going forward. The price has carved out a rising wedge breakdown after closing Thursday below the ascending trendline support at 114.23, where the 50-Daily Moving Average (DMA) aligns. Bulls could find a near-term bottom at the December 21 lows of 113.56. However, if the bearish pressures remain unabated, floors will open up towards the upward-sloping 100-DMA at 113.01. The 14-day Relative Strength Index (RSI) is pointing south below 50.00, suggesting that there is more room for the downside.

Should the BOJ refrain from hinting at the withdrawal of the pandemic emergency stimulus while showing its willingness to ease further, the currency pair could rebound above the critical support now turned resistance at 114.23, in a bid to recapture the 21-DMA at 114.82. The 115.00 round level will offer a stiff resistance on additional recovery.

USD/JPY daily chart