The Bank of Japan is playing with fire.
Today’s leak that they’re inclined to leave yield curve control unchanged isn’t a huge surprise given Ueda’s comments on Tuesday but the stronger confirmation has unwound some yen strength.
I wouldn’t take for granted that USD/JPY completes the round trip here.
Yes, the BOJ might not move at this meeting but there’s a chance they tee up something for later so it will depend on the statement. That said, the leak indicating no meaningful changes to 2024 and 2025 inflation forecasts suggests no rush.
To me, this is a baffling decision. Yes, Japan has struggled with low inflation for many years but the alternative is a much worse fate. If Japan were to ever be hit by UK-style high inflation, the fallout could be catastrophic for the financial sector and for government borrowing.
Ueda continues to argue that the risks of a return to low inflation are larger than the risks of high inflation and, to me, that’s nonsense. The past 30 years in Japan haven’t been some kind of painful disaster. Yes, it’s suboptimal but living standards have improved and disinflation was largely caused by global issues — namely the rise of cheap Chinese exports.
I think the trade for the BOJ is to wait and see what they deliver and if it’s yet-another kicking of the can on YCC, then buy USD/JPY with both hands and dare the MoF to defend 145.00. There’s a good argument for a more-hawkish Fed next week as well, and that could doubly boost this pair.
The FOMC decision is Wednesday and the BOJ on Friday.