USD/JPY: deflation tamed but not defeated, keeping BOJ on sidelines

Bank of Japan board members are divided on whether a multi-decade period of deflation is coming to an end, ensuring the bank continues to run far looser monetary policy settings than other major central banks, contributing to persistent weakness in the Japanese yen.

Deflation over but not defeated

Speaking on Thursday, board member Toyoaki Nakamura said it was premature to consider tightening policy, suggesting higher inflation reflected higher import prices rather than wage growth. Nakamura added tightening policy prematurely before wage gains were cemented would hurt household demand and weaken corporate profits. He also warned that while Japan was no longer in deflation, the deflationary mindset of its people was yet to be eradicated.

Japan’s inflation rate has exceeded the BOJ’s 2% target for 16 consecutive months, adding pressure on the bank to address negative real household income growth, including through taking action to support the Japanese yen. The core-core inflation reading – which strips out price movements from energy and fresh food prices -- also sits at double the bank’s target at 4%.

JPY weakness driven by BOJ unconventional policies

The BOJ has kept its key policy rate unchanged at -0.1% throughout the latest inflation outbreak, a level significantly below those of other major central banks. Beyond conventional monetary policy, it continues to adopt yield curve control (YCC), anchoring 10-year Japanese government bond yields around 0%.

While the BOJ made a small tweak to YCC recently allowing benchmark yields to drift further away from the 0% target, the unconventional policy continue to weigh on the Japanese yen by lessening the appeal of Japanese bonds relative to yields that can be obtained abroad. Unless the BOJ starts tightening monetary policy, the yen is likely to remain weak against other major currencies until other central banks begin cutting interest rates.

USD/JPY near-term dependent on US data prints

Nearer-term, USD/JPY fluctuation are likely to be dictated by Thursday’s US core PCE inflation report and US non-farm payrolls on Friday. Given Japanese bonds yields are capped out to 10-years, fluctuations in US bond prices will flow how the dollar fares against the yen.

USD/JPY has attracted buyers below 145.80 this week. Below that, a more prominent support level is located near 144.80. A break of that could usher a move back towards 143.50. On the topside, expect selling to emerge around 146.50 and again at 147.35.

Source: Trading View

-- Written by David Scutt

Follow David on Twitter @scutty

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