Date: 18 Sep 2018

The Bank of Japan will make its latest monetary policy announcement tomorrow, and it’s probably fair to say that markets aren’t expecting any material changes. Japan’s MUFG Bank expects “the Bank of Japan (BoJ) to leave monetary policy intact at its September 18-19 Monetary Policy Board meeting. The BoJ just recently strengthened its framework for monetary operations in July, so we do not expect any further changes to policy for now.” Given that Japanese monetary policy remains ultra-accommodative at a time when the Federal Reserve is set to hike rates twice more in 2018, the European Central Bank has announced a timetable for ending asset purchases and the Bank of England has tightened policy, such an outcome might ordinarily be expected to lend emphasis to yen weakness (USDJPY, EURJPY, GBPJPY). But there is an alternative narrative that is arguably particularly pertinent when there remains the prospect of market risk aversion derived from the continuing China-US trade war. The yen tends to be a beneficiary in times of global risk aversion. That alternative narrative incorporates the notion that inflation in Japan is ticking up. Economists polled by Reuters expect the Japanese core consumer price index, to likely increase to 0.9 per cent in Japan’s current fiscal year that ends on March 31, 2019 and that when the BoJ next alters monetary policy, although the expectation is that such a move remains a long way off, the move will be to remove some ultra-accommodativeness, not add to it. While yen bears will be unconvinced, there’s a school of thought that an unchanged BoJ monetary policy combined with an ongoing China-US trade dispute could translate into yen strength against a number of major and emerging market currencies, and even versus the US dollar itself.

by Neal Kimberley, External Currency Analyst