It was quite odd that the Bank of Japan (BOJ) kept mum about the yen and made no mention of new plans to ease its monetary policy in its latest meeting minutes.
Considering that the yen had appreciated quite a bit since mid-March, more than a few market players were expecting to hear a remark or two about the BOJ’s strategy to keep it from returning to February’s highs. But surprise, surprise – the central bank didn’t reveal anything new!
This week, it seems the BOJ felt the need to make up for disappointing the markets, as a couple of the central bank’s top dogs stepped up to do a bit of jawboning.
BOJ Deputy Governor Hirohide Yamaguchi spoke recently and said that the central bank should pay special attention to the yen, as he feels that exports, corporate profits, and overall business sentiment could suffer if it continues to appreciate.Meanwhile, Kiyohiko Nishimura, also a deputy governor at the Bank of Japan, added that the Japanese economy needs more stimulus for it to continue its recovery.
Nishimura feels that global economic uncertainties, such as those surrounding the European debt crisis, continue to pose a huge threat to Japan’s growth and that policymakers should act to bolster economic stability.
However, the markets were most moved by what came out of BOJ Governor Masaaki Shirakawa’s mouth on Thursday.
According to Shirakawa, the BOJ is sticking to its guns and is “fully committed to continuing powerful monetary easing through various measures.” Those are big words from the central bank’s head honcho, but what do they mean?
In layman’s terms, it means that the central bank is prepared to do whatever it takes to boost the economy.
As such, it’s likely that it will keep interest rates at near-zero levels and will continue buying assets until it hits its 1% inflation target – a strategy that helped spark the massive yen sell-off that we saw from mid-February to March.
All of this speculation, together with the return of risk appetite, could explain why yen pairs have been rallying in recent days. Looking forward, I think that the yen may remain frail over the coming days, assuming that risk sentiment doesn’t turn sour, of course.
With the Fed expected to maintain its wait-and-see approach in the FOMC statement on Wednesday and the BOJ expected to expand its balance sheet in its monetary policy statement on Friday, the odds look stacked in favor of a USD/JPY rally.
But in my opinion, it will take something unexpected for the yen to forge fresh lows.
Word on the street is that the market is already pricing in an expansion in the asset-buying program of about 5 trillion JPY, so the BOJ will probably have to hit the markets with a big surprise for USD/JPY to hit new highs and rise above 84.00.
There are a few analysts out there that believe that a larger expansion or a higher inflation target could do the trick. What do you guys think?