BOJ Preview: Yen has room to (temporarily) fall on downgraded outlook, worrying virus state

  • 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. 

Elusive inflation

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:

Source: FXStreet

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:

Source: BOJ

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.

See Delta Doom is set to storm America, the dollar could emerge as top dog

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