USDJPY has broken the box pattern in upside and retesting the broken area of the pattern.
The Bank of Japan has decided to keep the interest rates unchanged and make no adjustments to its Yield Curve Control policy in the latest meeting. However, it has observed a decrease in wage prices and a decrease in inflation below the target of 2% in the previous month. The Bank of Japan’s goal is to ensure that wage prices increase in line with economic growth, as part of its efforts to achieve its inflation target.
The Bank of Japan is scheduled to hold its monetary policy meeting on Thursday and Friday, June 15th and 16th. This article discusses the expected outcomes of the meeting, including the BOJ’s likely decision to maintain its current monetary policy settings and its forecast for a moderate economic recovery. Furthermore, there are indications that the BOJ may upgrade its price forecasts in the coming months. The article also explores the factors influencing the GBPJPY exchange rate, such as the monetary policy divergence between the Bank of England (BoE) and the BOJ. Additionally, it analyzes recent inflation and economic data from Japan and the United Kingdom, providing insights into their impact on the GBPJPY pair.
Maintaining Interest Rates and Yield Curve Control
The BOJ is anticipated to maintain its short-term interest rate target at -0.1% and the 0% cap on the 10-year bond yield under its yield curve control policy. This decision aligns with the central bank’s goal of sustaining a moderate economic recovery. According to BOJ Governor Kazuo Ueda, there have been changes in corporate price-setting behavior that could potentially contribute to higher-than-expected inflation.
EURJPY Market has broken the Ascending triangle pattern in upside.
Consumption also appears to be robust, providing a solid foundation for the Japanese economy. However, to ensure the continuity of these positive signs and support the sustainable achievement of 2% inflation, the BOJ must continue to provide economic support. This sentiment is echoed by multiple sources within the BOJ.
GBPJPY Exchange Rate and Monetary Policy Divergence
The GBPJPY exchange rate has been on an upward trajectory for the fourth consecutive day, reaching its highest levels since early 2016. This appreciation is attributed to market acceptance of the monetary policy divergence between the BoE and the BOJ. The BoE’s recent hawkish concerns have not been substantiated by policymakers’ comments, with Catherine Mann emphasizing the need for a long-term agenda to defend growth prospects in the UK. The Confederation of British Industry trade body also suggests that while Britain’s economy may avoid recession this year, underlying issues like weak business investment persist. Moreover, the higher inflation in the UK compared to Japan favors the GBPJPY bulls, contributing to the currency pair’s strength.
Japan’s Producer Price Index (PPI) and Monetary Policy Outlook
Japan’s PPI for May indicates a fifth consecutive monthly decline to 5.1% year-on-year (YoY), falling short of market forecasts. The monthly figures also disappointed traders, with a -0.7% month-on-month (MoM) outcome, compared to expectations of -0.2%. BOJ Deputy Governor Masazumi Wakatabe rules out any changes to the BOJ’s monetary policy during this week’s meeting, further supporting the idea of maintaining the current policy settings.
GBPJPY is moving in an Ascending channel and the market has reached the higher high area of the channel
Notably, there is significant selling pressure in the Treasury bond market, favoring higher yields and GBPJPY prices. Hedge funds are extending their record selling streak of short-dated Treasuries, indicating that the Federal Reserve’s fight against inflation is far from over. However, the recent hawkish bets favoring the BOJ’s exit from ultra-easy monetary policy challenge the GBPJPY bulls.
Outlook for BOJ Monetary Policy and Economic Recovery
Despite the aforementioned pressures, it is expected that the BOJ will maintain its ultra-loose monetary policy and its forecast for a moderate economic recovery.
Strong corporate and household spending in Japan have mitigated the impact of slowing overseas demand. The BOJ might also signal that inflation is exceeding its initial projections, potentially leading to an upgrade in its price forecasts in July.
CADJPY is moving in an Ascending channel and the market has reached the higher high area of the channel.
However, an upgrade in inflation projections does not necessarily imply an immediate interest rate hike. BOJ Governor Kazuo Ueda has emphasized the importance of durable wage growth accompanying price increases before considering a change in policy. The BOJ’s view of a moderate recovery is further supported by the post-pandemic pickup in consumption offsetting weak exports.
Inflation Trends and BOJ’s Forecasts
Although the BOJ will not release fresh inflation forecasts during the upcoming meeting, there are indications that inflation is surpassing initial projections. Japan’s economy exhibited stronger-than-expected growth of 2.7% in the first quarter, driven by robust capital expenditure and solid domestic demand.
Core consumer inflation reached 3.4% in April due to ongoing price hikes by companies, challenging the BOJ’s expectation of a gradual return to below 2% inflation by the latter half of the fiscal year ending in March 2024. An index excluding the effects of fresh food and fuel, considered a key indicator of domestic demand-driven price trends, increased by 4.1% YoY in April, marking the fastest pace in four decades. These trends indicate that inflation is indeed overshooting the BOJ’s initial projections.
Yields on Japanese Government Bonds and Policy Outlook
Yields on Japanese government bonds experienced a decline on Monday as investors bet on the BOJ maintaining its stimulus settings at the upcoming meeting. The 10-year JGB yield retreated to 0.420%, further below the 0.5% policy cap set by the BOJ. While there were previous expectations of adjustments or the elimination of yield curve control (YCC) during the first half of the fiscal year, it is now evident that investors cannot wait for higher yields before making their purchases.
AUDJPY has broken the Descending channel in upside
Consequently, the yields on the five-year, 20-year, and 30-year JGBs also decreased. Market analysts suggest that Governor Ueda is unlikely to make any policy changes during this week’s meeting and may not do so until late this year or even next year.
Conclusion
The upcoming Bank of Japan monetary policy meeting is expected to maintain the current ultra-loose monetary policy settings and the forecast for a moderate economic recovery. The BOJ may signal that inflation is surpassing its initial projections, potentially leading to an upgrade in price forecasts in July. However, durable wage growth remains a key consideration before any interest rate hikes can be expected. The GBPJPY exchange rate has been influenced by the monetary policy divergence between the Bank of England and the BOJ, along with inflation and economic data from Japan and the UK. Overall, the decisions and statements made during the BOJ’s meeting will provide valuable insights into the future direction of Japan’s monetary policy and its economic recovery.
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