In a violent, stop-hunting rollercoaster session, the yen rose, then fell, then rose again, with the USDJPY trading at session lows at 6am ET after the BOJ first released language that was deemed more hawkish than expected, with the central bank reversing its December inflation phrasing from "inflation expectations have remained in a waekened phase.” to "inflation expectations have been more or less unchanged” in Tuesday’s statement, only to later reverse the move after Governor Haruhiko Kuroda damped speculation policy makers are moving closer to reducing monetary stimulus.
Kuroda also said the central bank must maintain its current monetary easing program as inflation is still distant from its 2 percent target. Earlier the Yen strengthened after the BOJ said inflation expectations had stopped falling, though risks to prices remain "skewed to the downside."
The move by the BOJ to keep its price and economic forecasts unchanged “suggests that there won’t be any change in policy for some time,” Marshall Gittler, strategist at ACLS Global, wrote in note. “The yen can go back to a weakening trend once speculation about tightening elsewhere heats up.”
The central bank cut purchases of longer-maturity bonds this month, prompting speculation it will allow 10-year yields to rise above its current target of around zero percent. However, during the news conference, Kuroda said that the central bank’s short-term bond operations are dictated by operational factors and don’t imply changes to policy.
And after all the volatility and stop hunts, the Yen was last seen trading at session highs, with the USDJPY back under 110.50.
Some more from Goldman on Kuroda's press conference:
BOJ Governor’s press conference: Dampened expectations for an early rate hike
- The Bank of Japan (BOJ) held its Monetary Policy Meeting (MPM) on January 22-23, and kept its monetary policy unchanged in all areas, including both targets for short- and long-term interest rates (short-term: -0.1%; long-term: around 0%), as widely expected. It also maintained its guideline for long-term JGB purchases (of increasing its net holdings at a pace of about ¥80 tn a year), as we expected. In the quarterly Outlook Report, the BOJ maintained the status quo in terms of the growth and inflation outlook, and kept the deadline for achieving its 2% inflation target by around FY2019.
- With regards to inflation expectations, the BOJ upgraded the current assessment on its monetary policy statement to "more or less unchanged" from "remained in a weakening phase." On the risk discussion in the Outlook Report, however, the BOJ said again that the risk was stronger to the downside in terms of medium-/long-term inflation expectations, which suggests to us that its confidence in achieving the 2% inflation target has not increased.
- At the press conference following the MPM, Governor Kuroda emphasized that the BOJ would stick to its 2% inflation target, that there was no policy intent in the reduction in its JGB buying operations (which caused the yen to appreciate on January 9), and that it had not reached the stage where it was considering an exit strategy. As we expected, the BOJ strongly reiterated its stance that it would stick with current monetary easing until achievement of the 2% inflation target comes into view, which seemed intended to dampen excessive expectations in the markets about an early rate hike.
Too early to consider exiting unprecedented easing
- Governor Kuroda stated that Japan's CPI inflation, excluding energy, was still only barely in positive territory, and that inflation is much lower than in the US and Europe. He went on to say that the BOJ had therefore not reached the stage at which it would consider an exit, and he reiterated the importance of persevering with current monetary policy. The BOJ's monetary policy statement upgraded its view on inflation expectations, but Governor Kuroda said he felt no need to adjust yield curve control in tandem with it.
- Similarly, with regards to the ETF buying program, Governor Kuroda emphasized that he saw this as just one element of the overall monetary easing framework designed to achieve the 2% inflation target. He added that he does not need to consider adjusting it, out of concern of any side-effects at this stage, given that expectations on the stock market were not excessively bullish, and issues had not arisen even on the corporate governance front.
- Governor Kuroda also played down the comments made by some broad members during the December MPM about whether it was time to consider adjusting interest rate levels, and about ETF purchasing side-effects. Mr. Kuroda said that these comments were just one part of a wider debate, which concluded that the BOJ should continue with both yield curve control and ETF buying.
No policy intent in BOJ’s reduced JGB buying operations
- As expected, Governor Kuroda emphasized two points with regard to the BOJ’s reduced JGB buying operations, which triggered a sharp appreciation of the yen on Janaury 9. First, the BOJ’s target under the yield curve control policy is interest rates not quantity (amount of JGB purchases), and therefore the figure of ¥80 tn in annual purchases is merely a guideline and not a binding target to be achieved. Second, policy decisions are made at the BOJ’s Monetary Policy Meetings, and there is no policy intent whatsoever in technical changes to daily JGB buying operations in response to market conditions.
- Furthermore, Governor Kuroda noted that the yen’s appreciation versus the US dollar on January 9 could stem from a ripple effect from the US currency’s depreciation against a strong euro, and he questioned the direct link to the BOJ’s reduced JGB purchases. As such, Mr. Kuroda appears keenly intent on suppressing excessive market expectations of an early rate hike to avoid inviting premature yen appreciation, which could dampen inflation in the future.