The Bank of Japan (BoJ) continued its ultra-loose monetary policy structure, maintaining its 0.25 % limit on 10-year government bonds (JGBs) and the -0.1 % policy rate, defying a pattern of monetary tightening around the world.
The result was a slight shift in the value of the Japanese Yen relative to the US Dollar. Following an initial response to the negative, USD/JPY has not altered much. The lack of Yen depreciation, in this case, may be explained by revised inflation expectations.
The Bank of Japan (BoJ) raised its inflation prediction from 1.9% in April to 2.3%. Compared to the year before, core inflation increased by 2.1% in May, marginally exceeding the central bank’s % objective.
The prediction for the core CPI, which excludes energy, for the following year increased from 1.1 to 1.4%. Nevertheless, when supply chains recover, prices are anticipated to stay below expectations. Core prices without energy are expected to decline to 1.3% by 2024, up roughly from 1.1 % but still significantly under the set objective.
The repercussions of the conflict in Ukraine, China’s COVID lockdowns, and rising rates internationally were highlighted by the central bank when it reduced its GDP prediction for the present fiscal year from 2.9% to 2.4%. Real wages have decreased for Japanese workers as prices have increased faster than nominal wages. The greatest decrease in real wages in nearly two years was evident in government data for May, which was released in early July.
The bank’s ultra-loose policy has been vigorously defended by Governor Haruhiko Kuroda, whose term is due to expire in April of 2023, despite the Yen falling to a low of half a century. Due to this downturn, import prices are now even higher. Japan announced a 1.38 trillion Yen trade imbalance for June earlier on Thursday. Seasonally adjusted, it reached its highest level since 2014 when it was the highest in recent years. As the global economy slows, Japan’s trade balance is expected to continue to be in deficit, which would restrain demand for its products and pressure on the Japanese Yen for an extended period of time.
In an unusual step, the policy statement classified foreign currency rates as an economic risk back in April. Many regarded that as an indication of unease and predicted greater Yen depreciation, which might necessitate official involvement. That sparked the “widow maker” trade, short bets against JGBs.
To preserve its yield cap, the BoJ had to purchase an exceptionally large number of bonds. As traders preferred tail-risk chances for the Yen to rise in response to the announcement on Thursday, short bets on the USD/JPY also climbed on the currency side. With today’s announcement, such wagers gradually increased.