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BOJ Outlook Report: Market Expectations

Markets were shocked in December when the Bank of Japan (BOJ) appeared to take the first step away from its decade-long stimulus policies. Will the BOJ continue this trend at today’s meeting?

The BOJ Outlook Report, to be released today, will provide valuable insight into the bank’s view of economic conditions and inflation, which will shape future monetary policy. Traders should pay attention as a more hawkish outlook is typically positive for currency.

Will Japan Inflation Lead To A Hawkish Report?

The acceleration of inflation in Japan has set the stage for a hawkish stance from the Bank of Japan (BoJ). The BoJ’s monetary policy decisions are heavily influenced by inflation, and an uptick in consumer prices may prompt the central bank to take a more cautious approach to monetary stimulus. 

Traders and investors should keep an eye on the BoJ’s outlook and policy decisions for insight into the bank’s view on the economy and its potential impact on currency.

The recent data from Japan’s Domestic Corporate Goods Price Index (DCGPI) has raised concerns among economists as it showed a 0.5% month-over-month and 10.2% year-over-year increase in December, nearing the peak of 10.3% set in September.

Despite the decrease in commodity prices, prices within the country remain stubbornly high. This phenomenon is particularly surprising given Japan’s historical struggle with deflation, often attributed to its aging population.

This trend could have significant implications for the country’s economy and monetary policy. 

The Bank of Japan (BoJ) has long been attempting to achieve its 2% inflation target and this uptick in inflation may prompt the central bank to take a more hawkish stance on monetary policy. 

This, in turn, could lead to a stronger yen and impact the country’s export-dependent economy.

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Impact Of Lower Prices

Furthermore, the stubbornness of prices despite lower commodity prices could be a sign of stronger domestic demand, which is a positive for the economy. 

However, it also raises concerns about possible inflationary pressures and the need for the BoJ to take a more proactive approach in managing monetary policy.

Overall, the DCGPI data provides valuable insight into the current state of Japan’s economy and traders and investors should pay attention to the BoJ’s outlook and policy decisions in the coming months to gain a better understanding of the bank’s view on the economy and its potential impact on currency.

The Bank of Japan (BoJ) has managed to temporarily halt the decline of the yen by reversing about half of the losses since the beginning of 2021. 

However, increased exchange rate volatility is putting pressure on sellers to increase their margins, which prolongs inflationary pressures and increases the risk of triggering a price-wage spiral, a feared outcome for central banks worldwide.

With this level of inflationary resilience, investors are expecting to see a more hawkish stance from the central bank. 

In line with this expectation, the BoJ has been engaging in record purchases of Japanese government bonds in recent days in order to prevent their yields from rising.

However, the rising yields on government bonds are putting pressure on the budget. 

The sustainability of Japan’s finance ministry is being called into question, considering the country’s massive national debt, chronic budget deficit, and sluggish economic growth.

Bank of Japan 10 Year Treasury Yield

Bank of Japan 10- year treasury yield

What Are The Available Options For The Bank Of Japan?

The Bank of Japan (BoJ) may take a decisive turn in its policy targeting government bond yields and even consider a key rate hike, which could lead to a continued strengthening of the yen towards 120 by the end of Q1. 

However, there is also a possibility of the central bank taking a surprise move and strengthening its negative rate policy, causing the yen to take a sustained downward path. 

This sudden change could be particularly impactful on the currency as market expectations are currently skewed towards a tightening of policy, though not as drastic as in other regions such as the USA or Eurozone. 

In this scenario, the USDJPY could reach 133 quickly and aim for 140 by March.

On the other hand, the BoJ may choose to balance out its signals and not cause market turbulence as it did at its last meeting in December. 

The inflation picture, despite the risks it poses to the economy, indicates that a tightening of policy is a viable option.

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Author

  • Zahari Rangelov

    Zahari Rangelov is an experienced professional Forex trader and trading mentor with knowledge in technical and fundamental analysis, medium-term trading strategies, risk management and diversification. He has been involved in the foreign exchange markets since 2005, when he opened his first live account in 2007. Currently, Zahari is the Head of Sales & Business Development at TraderFactor's London branch. He provides lectures during webinars and seminars for traders on topics such as; Psychology of market participants’ moods, Investments & speculation with different financial instruments and Automated Expert Advisors & signal providers. Zahari’s success lies in his application of research-backed techniques and practices that have helped him become a successful forex trader, a mentor to many traders, and a respected authority figure within the trading community.