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August BOJ Monetary Policy Statement Preview

by City Index

The Bank of Japan (BOJ) will conclude its 2-day monetary policy meeting on August 7th, with traders expecting no changes to interest rates or the bank’s ¥80 trillion annual quantitative and qualitative easing (QQE) program.

As a reminder, the central bank decreased its expectations about economic growth and inflation in its most recent meeting on July 15th. The median forecast for real GDP in fiscal year 2015, which runs from April until March, was decreased from 2.0% in April to 1.7% year-over-year in June, though policy board members’ median forecasts for fiscal year 2016 and 2017 were unchanged from April at 1.5% and 0.2% respectively. Crucially, the average core CPI reading was also revised lower by 0.1% across the board, to 0.7% in fiscal year 2015, 1.9% in fiscal year 2016, and 3.1% in fiscal year 2017.

Despite the slight downward revisions to the BOJ’s economic projections, Governor Haruhiko Kuroda was optimistic on the prospects for the Japanese economy, noting that the slowdown in export and import growth was expected to be “temporary” and that “exports [were] expected to increase moderately, albeit with some fluctuations, due to improvements in overseas economies and the boost from a weak yen.”

With no outright changes expected to the bank’s policy in the upcoming meeting, traders will closely monitor how Kuroda explains the bank’s outlook in the monetary policy statement, particularly with regard to the bank’s chief risks, “developments in the emerging and commodity-exporting economies, the prospects regarding the debt problem and the momentum of economic activity and prices in Europe, and the pace of recovery in the U.S. economy.” Interestingly, many analysts are skeptical of the BOJ’s ability to generate inflation in the Japanese economy, with some market-watchers even calling for an increase in the bank’s QQE program later this year; any signs that the bank is considering such a move could lead to a fresh bout of weakness in the yen and possible strength in Japan’s main stock market index, the Nikkei 225.

Speaking of the major Japanese markets, USDJPY’s uptrend suffered a setback in June after the BOJ and Japanese government warned against excessive weakness in the yen. If USDJPY starts to establish itself consistently back above the 125.00, traders will be wary of a similar warning from the central bank. Likewise, the Nikkei’s prolonged uptrend has been built on easy monetary policy and a weak yen, so a more optimistic economic assessment from the Bank of Japan could lead to a pullback in the index.

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