The national CPI data released in Japan for March missed expectations, rather than expanding to 1.4% as expected, it remained at 1.3%, where it has been since December 2013. Due to this some analysts think that the BOJ will need to add more stimulus in the near term, to stem the threat of falling prices down the line.
However, we don’t think that the BOJ will be that quick to add more stimulus for a few reasons:
- Although national CPI fell in March, it is likely to pick up in April due to the sales tax increase.
- Tokyo CPI rose to the highest level since 1992 this month, with annual core CPI jumping to 2% from 0.4%.
- While an increase in prices is to be expected after a sales tax increase, it is worth watching this closely. If we continue to see pass through from the tax rise in the coming months then the BOJ could back away from easing.
- The BOJ has repeatedly said there is a limit to how long the BOJ will support the government bond market, it is already purchasing nearly $500bn JGBS (Japan government bonds) each year.
- Further QE may do more harm than good. 10-year yields have been falling even though inflation has been rising, and they are close to their lowest ever level. If the BOJ embarks on more QE it could create a “QE trap”, increasing the risk of a sharp spike in yields when it tries to exit its stimulus programme.
- Although the BOJ could extend its purchases of non-government securities, this is a riskier strategy and more difficult to implement, so may not be an attractive option to the BOJ at this stage.
Thus, in our view, further QE from the BOJ is not a given and we do not expect them to announce further stimulus measures at next week’s meeting.
What does this mean for USD/JPY?
If the BOJ does not boost stimulus on 30th April, then we could see some downward pressure on this pair. USD/JPY remains stuck in a tight range, with the focus on resistance at 103.06 – the 61.8% Fib retracement of the latest sell-off. A break above this level would be a bullish development that could open the way to the April 4th high at 104.13.
USD/JPY has declined on Friday and short-term support lies at 102.09 – the low from this week, below here opens the way to 101.20 – the March 3rd low. This is a solid level of support that has prompted a rebound twice since March, and could cushion any downside if the BOJ decides to refrain from adding stimulus next week.
Overall, when it comes to USD/JPY right now, the range rules. A good payrolls number next week could trigger an upside break, while a neutral stance from the BOJ could trigger some downside, although we think that 101.20 could act as solid support.
