Despite the BOJ doing essentially nothing at its latest meeting, the yen weakened substantially. The USDJPY jumped over two large handles in the aftermath, even with a weaker dollar. Clearly, the markets were disappointed with what just happened, and were expecting that some progress would have been made in getting out of ultra easing.
As we anticipated, many traders had taken Governor Kazuo Ueda’s comments earlier in the month as a sign that the BOJ would move towards tightening. But, they didn’t. There were some key comments from Ueda, however, which put the onus squarely on the upcoming data. Which means the volatility for the Japanese pairs could be far from over.
The main disappointment came from Ueda saying that not only would there be no moving away from easing this time, but it wouldn’t happen in January, either. Markets had been pinning on hopes that either at this meeting or the next would come with a substantial hint that a move towards tightening was coming.
But, in those comments, Ueda dropped two key things. First, he said that he saw nothing to change the course on policy until March. Which implies that the BOJ’s timetable of starting tightening in the third month of next year remains intact. Secondly, and perhaps more crucially for traders in the shorter term, he said that there was little data expected from here to the next meeting that would change the outlook.
That means if the key data points that are expected from here to March remain in line with expectations, then there is not much chance of a change in BOJ stance. Which sounds disappointing, initially. But it also means that a miss or beat on expectations could potentially substantially shift the BOJ’s outlook.
What are those key data points? Inflation, obviously, as that’s the main target for the BOJ. But Ueda specifically said that the bank wants to see more information on the wage-inflation cycle. If wages and inflation are both rising at a pace above the BOJ’s target, then it might proceed to what it calls “normalization”. Which means the upcoming CPI and wage data from Japan are likely to determine the yen’s direction over the coming couple of months.
Friday sees the last major Japanese data point for this year, with the release of its November CPI reading. Headline inflation is expected to come down to an annual pace of 2.6% compared to 3.3% prior. That’s hardly a ringing endorsement for exiting tightening. But, the BOJ’s lack of motivation to raise rates is based in large part on an expectation that inflation will fall substantially over the next couple of months. Which means a surprise to the upside could provide the opportunity for investors to renew bets that the BOJ will move towards easing.
Particularly given Ueda’s final major comment from his post-earnings presser: Surprises can’t be ruled out. He had previously said that the market should be informed well in advance about future changes in BOJ policy. This was a departure from previous BOJ practice of surprising the market with its moves. It looks like Ueda is trying to signal a return to potential surprises, which could leave the market even more volatile, particularly after the holidays.
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- Source: https://www.orbex.com/blog/en/2023/12/can-japanese-inflation-shock-the-boj-into-action
