The Bank of Japan implemented a new strategy this week in order to control its rising bond yields. Yields have been gradually rising on speculation that the Bank of Japan may look to rethink its fluid Monetary Policy. The speculation has seen yields, and the Japanese Yen fluctuate. The USD/JPY seeing minor swings over the last week, but for the most part, hovering around $¥111.
The Bank of Japan issued its bond-buying offer for the second time this week. The offer which was made to a fraction of investors equated to roughly 94 Billion’s worth of bonds being sold. These consisted of 5-10-year bonds. The BOJ acquired the Bonds at 0.10 a level.
The Japanese Central bank announced that the bond-buying program was implemented for the bank to meet policy objectives. Notably to keep 10year bonds at the 0%. Investors will almost certainly look for further clarity from Governor Haruhiko Kuroda on his policy when he delivers his Monetary Policy statement early next week.
The upcoming Monetary Policy statement could also see measures being implemented to benefit Japan’s inflation. Recently Japans inflationary data has highlighted weakness forcing the central bank to reconsider its forecast. Japan’s While fell short of the benchmark 2%, with this level only deemed as achievable over the next three years.
The BOJ implemented a hefty money printing program for 5 years, and as yet it has failed to inspire an upturn in inflation with BOJ policy makers finding themselves between a rock and a hard place. As it stands, the Bank of Japan would struggle to provide a rationale for reducing its money printing program. Japanese inflation remains far from the ideal with YoY core consumer price rising just 0.8% in July.
Investors anticipate that consumer inflation will increase, this is partly due to the rise in oil prices, experts anticipating that consumer-driven inflation could touch 1% by July.
There has been much speculation that Haruhiko Kuroda will toy with the current framework of the Bank of Japan’s monetary policy, it is understood that the Bank of Japan will focus on creating a more sustainable program despite the fact that it may achieve its price objectives later than planned.
While the most probable outcome is that Governor Kuroda will leave policy unchanged this month, speculation remains to writhe. The economy contracted in the last quarter and manufacturing now looks vulnerable; In particular, the parts manufacturing sector which shares a correlation with Japan’s export market. Inflation, as covered above, remains weak moving further away from the 2% target.
Despite the run of poor economic data, the central bank seems more focused on bond yields. Ideally Kuroda wants 10-year government bond yields to remain at 0%. Currently, yields sit at around 0.087% which has led investors to believe a tweak may occur in the near future to reign yields in. The purchase of Japanese Government Bonds seen this week could indeed be the first steps to keeping 10-year bond interest rates at 0%. Whilst it appears that nothing will be left off the table in terms of policy change, variations in policy could see yields trade in a wider range. Other economists believe the BOJ could increase its target of 0% to steepen the yield curve, therefore encouraging lending and offer better borrowing rates to banks.
Despite many economists believing that the recent action taken in Japan’s bond market is to drive up the Japanese Yen the USD/JPY Currency pair have gained little momentum. The start of the week saw the USD fall significantly as trade war tension rose. With this being said the USD/JPY week low was seen on the 26th after the JBG purchase, the pair falling to 110.62.
The largest uptrend in the USD was seen following the release of the US core durable goods data. Although dollar also benefitted from the latest ECB press conference during which Draghi confirmed significant monetary stimulus was needed, his comments seeing investors head for the Dollar. The USD/JPY currency pair closing at 111.03 of Friday’s US trading session.
This week should see the consistencies in Dollar-Yen pricing with the pair continue. The USD/JPY rate of 1.11 remains a crucial as until now this level has resistance. If the trend continues the next levels of support for the pair will be 1.113 if data supports this level expect further gains although only over the shorter term. Key points and events that could disrupt this include, further talk of trade wars and tariffs. In short, expect possible USD gains but a short trading range.