No change in the Bank’s policy, but the tone is upbeat
The BoJ did not change its policy, as expected.
However, the Outlook Report released at the same time had a rather upbeat tone, which will give the feeling that progress is being made towards policy normalisation around April.
Governor Ueda’s press conference gave the impression of steady progress, although it did not raise excessive expectations in the media.
The content of the policy meeting was interpreted as somewhat hawkish and the yen initially strengthened, but subsequently bounced back, with the dollar rebounding to around ¥148.69 in the New York market. However, in Tokyo, Japan’s 10-year interest rate rose to 0.72%, the Nikkei fell and the USD/JPY dropped back. This is on the back of speculation that the BOJ is set to change its policy in March, but it may be going a little too far.
In Europe, PMIs showed a lull in recession in the manufacturing sector, while business confidence in the services sector deteriorated, while in the UK both manufacturing and services improved slightly.
The situation in the US is also favourable, with a very strong third quarter GDP of +3.3%, but the GDP deflator of +1.5% was well below the forecast of 2.3%. In addition, inventories were relatively high at +0.7, and the next GDP is likely to be lower due to higher inventories. Also released at the same time, New Unemployment Insurance Claims came in at 214 000, well above the forecast of 200 000. Considering that the previous release was 187,000, this is a significant increase. The dollar initially fell in response to these results, with the USD/JPY dropping to around ¥147.05, but eventually unwound to around ¥147.80 on a straightforwardly positive GDP result of 3.3%. Earlier, it rose to JPY 148.08 on the European market.
After all, the US economy is strong, so the possibility of a March rate cut has dropped below 50% at the moment, although some words suggesting a future rate cut may be included at the January FOMC meeting. Unless there is a sudden deterioration in US economic indicators, even if Japan normalises monetary policy, the dollar is likely to remain strong and the future dollar/yen exchange rate will be determined by US interest rates and US stock market movements.
Although the market is unclear, we would judge the USD/JPY downside to be reasonably firm.