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Hitoshi Suzuki, the member of the Bank of Japan’s policy board, pointed out over the weekend that the central bank could adjust its current yield curve control strategy as soon as inflation was moving towards its 2% target. This morning the comments of some analysts now point towards this meaning that the BoJ may be planning to start exiting from its expansionary monetary policy soon. Really? Anyone taking a look at inflation developments in Japan recently immediately realizes how pointless this comment is. The underlying price trend stands at only just above zero.
In view of this disappointing price trend, even the BoJ had to once again revise its inflation outlook to the downside recently so that if anything it has moved away further from a normalization of monetary policy again.
However, some now argue that the BoJ might tighten its monetary policy before inflation has reached its target. Of course, everything is possible. But in its forward guidance, the BoJ points out that it would stick to its expansionary monetary policy until inflation has even risen above its 2% target.
In its view, this is the only way it can finally overcome the long period of low inflation rates in Japan. It is doubtless that as a result, the BoJ is, therefore, furthest away from normalizing its monetary policy amongst all G10 central banks. Sorry to mention, dear JPY bulls! Courtesy: Commerzbank
With little new information at hand, we keep our trade recommendations unchanged. The dollar lost its upward momentum as select high profile drivers of support stalled. However, cyclical conditions are still strong in the US and USD positioning is modestly short ahead of the first FOMC in a year to possibly deliver higher “dots”. Thus, we encourage staying modestly long the dollar vs. CHF and JPY but shorts in near run.
Implied correlations between yen-crosses are rich for a benign post-Japanese election environment bereft of idiosyncratic yen risks; sell USDJPY vs. CHFJPY correlation swaps hedged with USDJPY FVAs.
