USD/JPY Fundamental Daily Forecast – BOJ Policymakers Remain Divided on Wage, Inflation Outlook

The Dollar/Yen is edging lower on Thursday after the Bank of Japan’s (BOJ) summary of opinions from its latest meeting showed policymakers were divided on prospects for achieving their 2% inflation target with some warning that it could take time for wages to rise sustainably.

The divergence in views highlight the challenge policymakers face in determining whether the recent cost-driven rise in inflation will shift to one backed by robust demand and higher wages – a prerequisite for raising ultra-low interest rates, according to Reuters.

At 02:45 GMT, the USD/JPY is trading 129.407, down 0.185 or -0.14%. On Wednesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $71.97, up $0.29 or +0.41%.

Many Board Members Saw Need to Keep Ultra-Loose Policy

At the January meeting, many BOJ board members agreed on the need to retain ultra-loose monetary policy to support the economy and help companies raise pay, the summary showed.

While some in the nine-member board pointed to broadening price hikes and heightening prospects of wage increases, others said price growth will begin to slow as cost-push pressures eases, the summary showed.

BOJ Kept Ultra-Low Rates, Beefed Up Tool to Defend Yield Cap

At the Jan. 17-18 meeting, the BOJ maintained ultra-low interest rates but beefed up a monetary policy tool to prevent the 10-year bond from breaching a 0.5% cap set up a month ago.

The central bank’s massive bond-buying to defend the yield cap has drawn criticism from market players as distorting the shape of the yield curve and draining market liquidity.

The board’s debate, however, focused on the need to keep long-term interest rates low, the summary showed, suggesting the BOJ was in no rush to phase out its massive stimulus program.

Short-Term Outlook

We’re leaning toward the bearish side of the USD/JPY over the near-term because the Fed is likely to begin preparing to end its aggressive rate hiking scheme beginning with a 25-basis point rate hike on Feb. 1. And Japan’s core consumer prices in December rising to a fresh 41-year high is likely to lead to the BOJ’s phasing out of ultra-low rates.

But the bears may have to wait until April for Japan’s central bank to make a hawkish move. That is when BOJ Governor Haruhiko Kuroda’s term ends. Recently, he stressed the need to maintain the loose policy settings until wages rise sufficiently, and keep inflation sustainably around the bank’s 2% target.

Later today at 13:30 GMT, traders will get the chance to respond to the latest data on U.S. Advance GDP, Durable Goods and the weekly jobless claims report.

Traders will be looking for any signs of weakness that will support the easing of Fed tightening. This could put further pressure on the USD/JPY.