BoJ Welcomes USD Resurgence Ahead of Elections

 The USD’s resurgence started as soon as all major markets were back to work after the Easter holiday. The dollar recovered across the board, and it continues to regain lost ground after a disappointing nonfarm payrolls (NFP) report was released on April 3. The U.S. added 126,000 jobs in March, missing expectations of 245,000 by a wide margin. Alarmingly, the latest jobs data is the lowest seen stateside since December 2013. The Bank of Japan (BoJ) will end its two-day meeting on Wednesday with little change expected to its current monetary policy. Upcoming elections and a weaker JPY will lead the central bank to refrain from taking any real action though Prime Minister Shinzo Abe’s aides are demanding further stimulus.

Gross domestic product (GDP) data for Japan, the world’s third-largest economy, showed the island nation is slowly clawing its way out of a sales tax-induced recession. Japanese GDP grew by 2.2% in the fourth quarter of 2014. While that is surely welcome news to BoJ officials, they will need to do more if they hope to achieve their 2% inflation target one year from now.

The USD/JPY traded below 119 after the U.S. NFP report emerged, regaining previous levels, and is now trading with a 120.50 target in sight. There are option expiries near the current spot levels that could keep the price near current levels. Since there are no expectations the BoJ will intervene in the market, the current price action will become less volatile. Meanwhile, minutes from the Federal Open Market Committee’s (FOMC) March meeting will be released on Wednesday at 2 p.m. ET, and provided the dovish tone of the FOMC’s statement is not evident in them, it could result in a further strengthening of the U.S. dollar.

BoJ Unlikely to Act

The BoJ is expected to stand pat and not announce any additional stimulus as the nation prepares for local elections. Elections for 11 prefectural governors and mayors of five cities will be held on April 12. The City of Tokyo is not part of these elections. Two weeks later, on April 26, there will be a second round to elect town and village heads.

Abe has been preparing for the elections but his promised reforms have been put on hold as some are not popular. Nevertheless, they are needed to boost economic growth, particularly if the Trans-Pacific Pact free-trade agreement is ratified.

Losses for Abe’s Liberal Democratic Party (LDP) would be used against him on the party’s presidential elections in September 2015. The only threat to LDP dominance is the Democratic Party of Japan (DPJ), though it has seen its numbers dwindle with 40% fewer candidates running in April’s elections. The Abe the government’s approval ratings rose ahead of the elections, and inarguably, that bodes well for the future of Abenomics.

Abe’s aide, Kozo Yamamoto, known as the architect of Abenomics, has made statements urging the BoJ to ease further. This is seen by the markets as rhetoric ahead of the elections, but it is also a sign of the pressure piled on the central bank as global macro conditions, and a lack of structural reforms, have made the bank’s 2% inflation goal appear well out of reach.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza