Japan Watch: The pros and cons for Ueda
The JPY market is one big roller-coaster at the moment as the market constantly tries to sniff out potential clues on when the Bank of Japan will catch up to the rest of the G10 central banks with a tighter policy.
In this piece, we look at the pros and cons of moving already this Friday for the Bank of Japan, but let’s take a look at the current back-drop before we move to the actual policy decision.
Markets started pricing in an elevated risk of a further increase to the yield-curve-control cap on Friday after a spike in wage data three weeks ago. The implied pricing in the 10yr point of the JGB curve reached almost 13 bps on the 12th of July hinting of a 50/50 probability of another move of 25bps. After Ueda hit the wires with anticipated dovish guidance last week, we have now fully retracted the pricing and only 2bps are priced in ahead of Friday.
It would in other words be an outright shocker if Ueda actually moved the needle on Friday.
Chart 1: Pricing of the BoJ YCC versus USDJPY
The Bank of Japan will update its projections on Friday and the fresh update from the Cabinet Office suggesting that 2023 fiscal year headline inflation will average 2.6% (up from 1.7%) is a strong hint that the Bank of Japan is under political pressure to at least increase the short-term hawkishness in inflation forecasts.
The central scenario for CPI ex fresh food in the fiscal year 2023 (April – April) stood at 1.8% in April up from 1.6% in January.
Another revision of 0.2-%-points would make an obtained inflation target the base case for the Bank of Japan, which has been one of the clear prerequisites for a tightening of the policy listed by the new Governor Ueda.
So why is the market not counting on a move already this Friday? Let’s look at the pros and cons.
Chart 2: The Bank of Japan’s official forecasts for inflation in fiscal years ahead