BOJ continues easing but more exit talk comes to surface

Introduction:

The Bank of Japan is struggling due to interest rate differentials. Last month Bank of Japan policy makers debated the need to examine the negative aspects of prolonged monetary easing. This conversation led to the discussion of abandoning the ultralow interest rates which have been in place for over 20 years. The Fed announces a CPI changed YoY of 7.7%, this beat the consensus of 7.9%. This a decrease of 0.5% compared to the October release of 8.2%.

Discussion of BoJ Abandoning Monetary Easing:

A majority of policy makers on the board of BoJ emphasized the importance in the continuance of an ultra loose policy at this time to ensure wages rise enough to compensate households for the rising cost of living. Some economists saw signs that the inflation pressure was broadening, including one warning that a “big overshoot of inflation cannot be ruled out”. The BoJ is considering the potential exit strategies of the ultra loose monetary policy and one of the main priorities is to ensure market participants will not panic if they decide to change their stance. The core consumer inflation rate increased to an 8-year high of 3% in September. This challenges the central bank’s approach towards monetary policy because of the yen weakness reaching 32-year lows which is increasing import costs. According to Kuroda, it is unlikely that the BoJ will tweak their monetary policy stance as he set the short term interest rates to -0.1% and relatively 0% for the 10 year bond yield. His perspective is that inflation will decrease back down to 2% which was their initial target. There is some speculation that when Kuroda’s term ends in April, the BoJ will tweak its yield curve control policy.

Fed CPI release

Following the Fed’s CPI figures, USD/JPY fell by 3.2% in 3 hours. The YoY change in CPI came in at 7.7%, the MoM change came in at 0.4%, and the core CPI MoM came in at 0.3%. All of these figures were below consensus which was the cause of the sell off in USD/JPY. There have been rumors surrounding the Fed discussing a slowdown compared to their recent rate hikes in the past few FOMC meetings.

Trading Outlook:

What could this mean for USD/JPY? For the rest of Q4-22, it is likely that the dollar stays strong against the Yen. But looking further into 2023, there is potential to see the Yen appreciate. It is essential to keep an eye on inflation for both Japan and the US because these figures are driving the market. If inflation does not settle down in Japan, the BoJ will be backed into a corner where raising interest rates could be their only option. In regard to the US, if inflation continues to slow, it is likely the Fed will decrease rate hikes or cut rates sometime in 2023.