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BoJ maintained status quo in its yesterday’s monetary policy review. And by now, it is not really a piece of news anymore: The Japanese central bank has again postponed the date by which it expects to reach its inflation target. It now believes it will do so in FY 2019 (April 2019 – March 2020), not in FY 2018. Against this background, it stuck to its expansionary monetary policy. The market did not react to this decision.
However, from my vantage point, this decision shows that the BoJ has really not many options left to fuel inflation. And as soon as the market realizes this and adjusts its inflation expectations downwards, the JPY may be in for an appreciation shock.
We think USDJPY trend is driven by a tug-of-war between interest rates and politics and expect politics to overweight interest rates eventually, resulting in a modest downward trend in USDJPY.
However, the recent developments look opposite as interest rate differentials dominate politics, and consequently, the tone in USDJPY is firm of late.
Amid bearish Yen scenario, we foresee USDJPY to hit 125 if:
1) The strong US growth leads aggressive Fed hikes and a spike in UST yields, resulting in broad USD strength,
2) The hawkish shifts by other G10 central banks accelerate to lead wider rate spreads with Japan and 3) Japanese government’s fiscal policy becomes more expansionary and the BoJ finances it, resulting in higher Japan’s inflation expectations.
Amid bullish Yen scenario, we foresee USDJPY to hit 100 if:
1) The global investors’ risk aversion heightens significantly, possibly due to deterioration in North Korea situation and/or US-Japan trade frictions.
2) The weak US economy dampens hopes for Fed hikes and leads broad USD weakness.
