Although the Bank of Japan views headwinds to the Japanese economy as more significant now, a tightening labour market suggests that inflation could finally accelerate, something that should support JPY strength into the end of the year, according to Jeremy Stretch and Bipan Rai, analysts at CIBC. 

Key Quotes: 

“The BoJ’s latest macro assumptions include increasing growth headwinds, which have contributed to a weaker inflation outlook. However, the bank still assumes stronger export growth in 2019 despite global concerns. The BoJ also remains cognisant of the unintended consequences of their ultra-easy monetary policy stance on financial institutions. However, the chances of a material policy adjustment in upcoming months remains doubtful.”

“While we expect the policy of stealth tightening to continue, investor flows via the weekly MoF bond flow data continue to reveal solid domestic appetite for overseas bonds. Therefore, it’s unsurprising that outside of extreme risk-off episodes, elevated spreads versus JGB’s have attracted domestic investors, thereby limiting JPY impetus.”

“The extension of stealth tapering, combined with signs of a gradual pick up in wage growth, should support JPY ahead. Annual average earnings advanced for a fourth consecutive month into year-end, underlining labour market tightness as seen in the job-to-applicant ratio which is near-50 year highs. That suggests that the BoJ will continue to view underlying conditions as consistent with rising inflation expectations, which should see the yen strengthen, with USDJPY reaching 105 by the end of 2019.”

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