- The Bank of Japan is set to leave its policy unchanged but downgrade its forecasts.
- An announcement of a climate program is unlikely to move markets, but virus concerns could bring the yen down.
- The safe-haven currency is unlikely to remain depressed for long as global concerns rise.
Can the Bank of Japan scare investors away from the yen? It is a tough task to impact the safe-haven currency, but the Tokyo-based institution can certainly try.
According to Reuters, the BOJ is expected to downgrade its growth outlook in its July 15 meeting. Such a move makes sense after the capital region extended its restrictions amid rising COVID-19 cases and the Olympic Games – due to begin a week after the BOJ's decision – will be held without spectators.
The Delta variant is spreading rapidly around the world, and causing investors reasons to worry, seeking havens. The yen is traditionally a currency to flock into in times of trouble, limiting the BOJ's potential to have a long-term effect.
Authorities in Japan would like to see a weaker yen that would contribute to exports and also push inflation toward the BOJ's elusive 2% target. Years of aggressive bond-buying, a negative interest rate of -0.1%, and massive government spending – debt to GDP are well beyond 200% – have yet to push prices higher.
Core CPI has been capped under 1% YoY:
Moreover, the Delta variant comes on top of a cooldown in both China and the US. Figures from the world's largest economies – Japan is No. 3 – have been missing estimates. The drop in China's Consumer Price Index to near 1% and signs that commodity prices such as lumber are off the highs also make the BOJ's task harder.
Back in June, the bank already extended its pandemic relief program to March 2022 and reiterated its policy to keep 10-year yields near zero. It is hard to see the BOJ announce new measures this time.
The only market-moving action is to downgrade this chart, from the BOJ's April forecasts:
What about climate change? Bank of Japan Governor Haruhiko Kuroda said in June that his institution would roll out measures related to the environment at the end of the year, and would provide more details in July. The European Central Bank also added fighting climate change to its goals in its strategic review, and markets shrugged it off.
The same will likely happen to the yen, as adding environmental parameters impacts buying of corporate bonds – but not the overall injection of money into the economy.
The BOJ is set to downgrade its forecast amid the spread of COVID-19 in Japan and around the world. That could weigh on the yen, albeit temporarily, as the currency is a safe-haven asset. Another beneficiary is the dollar, yet the yen usually has the upper hand.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.