“It’s important for Japan to reach a stage where inflation rises above 2 per cent and stabilizes at that level,” Japan’s Prime Minister Shinzo Abe said on September 13. “The government expects the Bank of Japan (BOJ) to continue efforts to meet the target.” With the BOJ’s latest two-day policy meeting finishing on Thursday, some might wonder if Abe was seeking to influence the proceedings. Whether that was his intention or not, the odds are that the BOJ will maintain its current policy framework as, in the words of France’s Societe Generale, “inflation [in Japan] remains far from the 2 per cent target set by the BoJ.” And although “the macroeconomic conditions for a pick-up in prices are in place [and] upward pressures on prices are likely strengthening,” SocGen still expects “core CPI (ex fresh food) to only grow by 1 per cent by mid- 2018, and remain far from the 2% target.” But there’s also another reason why traders might expect the BOJ to stay true to its existing course on this occasion.
With their terms having expired in July both Takehiro Sato and Takahido Kiuchi left the BOJ’s Policy Board. Both had consistently opposed the BOJ further expansions of monetary policy accommodation. Their replacements, joining the Board at this meeting, will be Goshi Kataoka and Hitoshi Suzuki. Both men have previously expressed support for the BOJ’s current strategy. If the BOJ maintains its current stance, there’s still the question of how the currency market could react especially when other central banks, such as the Bank of England, the ECB, the Fed and the People’s Bank of China, are either tightening or are seemingly on the cusp of doing so. Notwithstanding recent weakness for the Japanese currency which has accompanied a move higher in US Treasury yields, could changes at the BOJ still leave the yen playing the fall guy?