JPY: More time than expected – Rabobank

According to Jane Foley, Senior FX Strategist at Rabobank, one of the first headlines that came from this morning’s Bank of Japan press conference, was the statement from Governor Kuroda that there is no fundamental change in its yield curve control policy.

Key Quotes

“USD/JPY has traded higher on the back of Kuroda firm forward guidance and we maintain our forecast for a gentle appreciation towards the USD/JPY113 area on a 6 month view.”

“At the start of this year there was talk in the market that, on the back of strong Japanese economic growth in 2017, the BoJ may start to reverse away from its huge QQE policy. Although this subsequently died back as Japanese economic data disappointed, it did drive the JPY to firmer levels.”

“The BoJ has cut its inflation forecast.   It now sees core inflation growing by 1.5% in FY2019 down from a previous forecast of 1.8% y/y while its FY2018 forecast was reduced to 1.1% from 1.3%.     These forecasts alone indicate that it is likely to be some time before the BoJ takes its foot off the QQE peddle.   By introducing forward guidance to drive home this point, the BoJ will be hoping to head off speculation that it is thinking of watering down its policies.”

“Interest rate differentials suggest that USD/JPY should be driven higher in the coming months. This was our expectation at the start of the year but we were wrong footed by the surge in (mis-placed) market speculation of a potential BoJ policy tightening this year.”

“It remains our view that the BoJ along with the SNB will one of the last G10 central banks to start making a clear effort towards normalising policy.   Given that the Fed’s tightening bias has in recent month directed safe haven outflows from EM into the USD, we continue to look for a moderate appreciation in USD/JPY in the months ahead.”