BOJ Rate Decision Preview: Sharp yen moves grab attention

• The Bank of Japan not to make changes to its monetary policy settings in April.
• BOJ’s view on the yen decline will be critical amid inflation forecast upgrade.
• USD/JPY remains poised to retest 129.40, will BOJ aid the bullish move?

Following the conclusion of its two-day review meeting on April 28, the Bank of Japan (BOJ) is unlikely to announce any changes to its monetary policy settings. The central bank, however, is expected to upgrade its inflation forecasts amid a fragile economic recovery.

BOJ’s views on yen devaluation in focus

The BOJ is likely to maintain the benchmark policy rate at -10bps while holding onto its pledge to buy J-REITS at an annual pace of up to JPY180 bln.

Japan is witnessing a gradual uptick in inflation towards the central bank's 2% target, in the face of rising material costs. Inflation, however, remains modest when compared with soaring price pressures in other countries while still below pre-pandemic levels.

The central bank, therefore, may be in no rush to increase borrowing costs or modify a pledge to keep rates at current or lower levels, Reuters has reported, citing sources familiar with the BOJ’s thinking.

Governor Haruhiko Kuroda said last Friday, “the rise of inflation in services has been limited, indicating that inflation in Japan has not been as widespread as in the US.” 
The upgrade in its inflation forecasts for this fiscal year in the central bank’s outlook report is well priced in by the market. The main focus will be on the BOJ’s views on the recent sharp devaluation of the yen against the US dollar, which could cloud the nascent economic recovery.

A weaker yen serves as a double-edged sword for Japan’s economy, as it makes exports more competitive while on the other hand making energy – most of which has to be imported – and commodities prices more expensive, thus hurting businesses and consumers. 

Japanese officials have voiced their concerns about the yen’s decline, citing that the government was closely watching the impact of recent yen falls on Japan's economy and prices ‘with a sense of urgency.’

Japan's Finance Minister Shunichi Suzuki acknowledged earlier this month, “the yen dropping brings more demerits than merits.”

Meanwhile, Kuroda noted, “excessive, short-term FX volatility would affect business activity.” The BOJ Chief appears more concerned about the negative impact of the yen devaluation on the economy than rising inflation, at the moment.

Kuroda, therefore, maintained that their monetary policy should be aimed at providing accommodative financial conditions to support the achievement of a full-fledged economic recovery. 

That said, the central bank is likely to refrain from intervening to stem the yen’s decline even as it has conducted several unlimited fixed-rate purchase operations of Japanese Government Bonds (JGBs) over the past month to defend the yield cap at 0.25%.

Trading USD/JPY with BOJ decision

Technically, USD/JPY’s daily chart shows that the price is carving out a bull flag formation, in the face of the recent consolidation that followed a vertical rise from March 31.

The BOJ decision could help confirm the bull flag if the yen falls further on a dovish stance reassured by the central bank this Thursday. A sustained move above 128.70 will confirm the bullish continuation pattern, opening doors towards the 20-year highs of 129.40 once again. The 14-day Relative Strength Index (RSI) has moved away from extremely overbought territory, offering some hopes for bulls to re-enter.

In case of a hawkish pivot from the BOJ or strong verbal intervention, USD/JPY could breach the falling trendline support at 126.70. A daily close below the latter will invalidate the bullish formation, prompting bears to resume the correction towards the bullish 21-Daily Moving Average (DMA) at 125.56.

USD/JPY: Daily chart