JPY: Bank of Japan Turns More Dovish, but Yen Still Highly Dependent on Global Market Sentiment

Above: Governor of the Bank of Japan, Haruhiko Kuroda, File image. © European Central Bank

- BOJ keeps rates unchanged

- Tweaks interpreted as further easing

- JPY weaker following BOJ

- Global market sell-off triggers JPY recovery

 The Bank of Japan (BOJ) kept monetary policy unchanged on Thursday but struck a more cautious tone on the outlook than many had been expecting.

The event initially undermined the Yen, but domestic drivers were soon pushed aside as the safe-haven currency soon took a cue from a soft market tone and went higher.

Providing forward guidance, the BOJ said it intended to keep interest rates very low, at least through to around the spring of 2020.

The mention of a concrete date was a notable addition.

The BOJ’s main policy settings remained the same, with its short-term interest rate target at - 0.1% and continued to pledge to keep 10-year government bond yields above 0.0%.

The Bank did carry out some policy tweaks, however, which were interpreted as making monetary conditions 'even looser'.

Loose monetary conditions are generally associated with rock-bottom interest rates and the printing of money to support economic activity, which tend to weigh on a currency.

These tweaks included expanding eligible collateral for the BOJ’s provision of credit, improving and promoting the use of the fund-Provisioning Measure, relaxing of the terms and conditions for the Securities Lending Facility, and considering the introduction of an ETF Lending Facility.

The BOJ noted risks to inflation, which were probably behind their decision to keep monetary policy loose.

“With regard to the risk balance, risks to both economic activity and prices are skewed to the downside,” says the BOJ in its report. “On the price front, the momentum toward achieving the price stability target of 2.0% is maintained but is not yet sufficiently firm, and thus developments in prices continue to warrant careful attention.”

The BOJ lowered both FY 2019 and FY 2020 growth forecasts to 0.8% and 0.9%, respectively, from a previous estimate of 0.9% and 1.0%.

The BOJ also revised down inflation forecasts. CPI less fresh food for FY 2020 was revised down to 1.4% from 1.5%, and the first forecast for FY 2021 was set at 1.6%. It compares to an average reading of 0.8% over the past year.

The Yen Takes a Hit, but then Stages a Convincing Recovery

“The explicit commitment on low rates and lower CPI/growth forecasts paints a more dovish message, reflecting the difficulty in achieving the inflation target,” says Richard Kelly, head of global strategy at TD Securities. “The outcome helped to arrest the downward move in USD/JPY today.”

That the Yen went lower on the 'dovish' tenor of the BOJ event fulfils a classic currency reaction that we would have expected to such an outcome.

As mentioned, the rule-of-thumb is that when central banks loosen monetary policy (go more dovish), a currency tends to fall.

However, looking at the markets, we can see the Yen is sharply higher in early afternoon trade in London.

The Pound-to-Yen exchange rate is down by 0.45% at 1.44.07 while the Dollar-Yen is down a quarter-of-a-percent at 111.81.

The message is clear: while domestic factors are ultimately important for the Yen, other external factors are likely to have a more meaningful impact short-term.

“The new measures announced today are unlikely to have a significant impact in helping the BoJ to achieve their target. The BoJ was already widely expected to keep policy rates unchanged at least through around spring 2020 so the extra clarification is only a minor policy tweak,” says Lee Hardman, currency analyst at MUFG. “It helps to explain why the negative Yen reaction was limited following the policy announcement. The current favourable market conditions (low volatility) for carry trades are proving a more important driver for a weaker Yen this year even as yields outside of Japan have declined.”

Global markets are trading in the red today with investors displaying renewed caution.

This has had the predictable effect of driving capital in the the safe-haven Japanese Yen, which traditionally tends to benefit in such conditions.

Therefore, while the BOJ remains a force working against the Yen, global markets will remain the dominant driver for the foreseeable future.

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