The Bank of Japan will keep its policy unchanged for now. Positive price momentum gives the BoJ coverage to keep policy unchanged, despite speculation of premature normalisation. However, the BoJ is clearly running out of time, and the market knows this. While we can argue the data, the reality is that sustaining easing policy indefinitely is not an option.
In its Outlook for Economy and Pricing, both inflation and growth forecasts are expected to be revised higher. Global economic recovery will support Japan’s GDP growth. Consumer inflation should gradually improve (on Friday, Japan reported a core CPI increase to 0.5% from 0.2% in November), yet it remains below the 2% target. Meanwhile, the effectiveness of policy action and communication in weakening the yen is decelerating.
A rapid rise in US yields has uncharacteristically failed to boost USD/JPY appreciation. Moreover, lingering geopolitical risk (highlighted by US government shutdown) and potential disappointment in China growth could trigger JPY appreciation.