Yen Strengthens Ahead Of Bank Of Japan

The Yen has largely been trading sideways in recent months as the Bank of Japan holds off on adjusting monetary policy any further.  Abenomics in general is set to stay for the medium-term as Shinzo Abe retains the confidence of his party, enabling Bank of Japan Governor Haruhiko Kuroda the ability to keep policies extremely loose in an effort to help rebuild the economy. Unfortunately for Kuroda and Abe, other advanced economies and emerging markets are following their devaluation lead, making it increasingly difficult to hold onto the export gains. 

With international trade slipping and the export market shrinking, lack of adjustment to existing monetary policy from Japan might precede a more lengthy appreciation of the Yen, especially against the Euro in light of comments from the ECB.

BoJ Policy Expansion Less Likely

Industrial production data released overnight from Japan saw gains of 1.00% month over month, beating expectations of a -0.50% contraction and rebounding from the prior month’s print of -1.20%.  This along with forecasts showing inflation reaching the Central Bank’s target of 2.00% in 2017 according to the latest remarks is raising speculation among traders that the Bank of Japan will opt to leave easing measures unchanged during tomorrow’s monetary policy decision. 

Markets have been hoping for an announcement of further loosening measures, but the latest data shows that might be off the table, especially in light of the abundant deflationary forces.  Commodity prices continue to slip and international trade faltering exposes the weakness in the export economy.  Fighting this trend with more easing is the equivalent of spitting into the wind for the Bank of Japan.

While one of the early entrants into extreme monetary policy measures as a result of an ailing economy, the early results of quantitative easing were positive for Japan, namely via exchange-rate targeting.  With most developed economies promising each other not to engage in competitive devaluation of currencies, the next reasonable solution for policymakers was to adjust interest rates in order to impact exchange rates.