BOJ Falling Behind Other Central Banks

Japanese yen drops ahead of the BOJ Decision

The Bank of Japan (BOJ) will release its monetary policy statement around midnight EDT of Thursday, June 15. BOJ Governor Haruhiko Kuroda will host a press conference on Friday, June 16 at 2:30 am EDT. The Japanese central bank is not expected to change its current monetary policy despite the economy showing signs of life. The BOJ will maintain its negative interest rate and massive quantitative and qualitative easing programs unchanged. Earlier in the week the U.S. Federal Reserve has hiked rates as anticipated by 25 basis points and is looking to add another hike in 2017, while the Bank of England (BoE) kept rates at record low but minutes showed there were three votes for a hike.

The rate hike by the Fed and the words by Chair Janet Yellen have boosted the dollar across the board. The USD/JPY is trading at 110.76, a gain of 1.4 percent in the last 24 hours. The yen has also fallen against the pound; with the GBP/JPY rising 1.036 after the more hawkish statement form the BoE. In April the BOJ upgraded its assessment of the economy to a “moderate expansion” but low inflation persists despite all the efforts from the central bank. As many monetary policy makers before them they might employ rhetoric about a strong economy, yet not quite reducing the stimulus as it is still needed. Given the change in economic fundamentals the Bank of Japan could be left further behind by other G7 central banks.

The USD/JPY gained 1.70 percent on Thursday. The currency pair is trading at 110.93 continuing a dollar rally that was started by the U.S. Federal Reserve raised the benchmark US interest rate by 25 basis points as expected. The Fed also outlined the plans to gradually reduce its massive balance sheet later this year. The American central bank Chair was not concerned with inflation remaining weak and attributed current levels to temporary effects such as cellphone bills and drug prices.

The monetary policy divergence between the Fed and the BOJ will keep growing as the American central bank has already signalled it will continue to raise its rates and reduce the balance sheet it amassed as part of its QE program. The Japanese central bank is in no position to follow that lead. The improving economy is a factor, but so is the sluggish inflation that has failed to reach the 2 percent goal set by Prime Minister Shinzo Abe.

The GBP/JPY gained 1.397 in the last 24 horus. The currency pair is trading at 141.51 after the Bank of England (BoE) held rates but released the minutes of its monetary policy meeting where 3 out of 8 members voted for a rate hike. Rising inflation and the concerns of a bad Brexit deal will keep the BoE vigilant. The snap election resulted in a hung parliament which will put more pressure on Conservatives to push for a hard Brexit that the central bank has already warned could do great damage to the economy. In that sense a Conservative costly victory is good for the pound as it could extend the timeline and soften the leverage of the Uk negotiators.

Market events to watch this week:

Thursday, June 15
3:30 am CHF Libor Rate
3:30 am CHF SNB Monetary Policy Assessment
3:30 am CHF SNB Press Conference
4:30 am GBP Retail Sales m/m
7:00 am GBP MPC Official Bank Rate Votes
GBP Monetary Policy Summary
GBP Official Bank Rate
8:30 am USD Unemployment Claims
Tentative JPY Monetary Policy Statement
Friday, June 16
Tentative JPY BOJ Policy Rate
2:30 am JPY BOJ Press Conference
8:30 am CAD Core Retail Sales m/m
8:30 am USD Building Permits

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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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 has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. 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