Bank of Japan Surprises the Markets and Stays Ultra-Loose

Highlights

• It was a busy start to the day, with inflation numbers from Japan and the Bank of Japan in the spotlight.
• Hotter-than-expected Tokyo core inflation supported bets of a Bank of Japan tweak to ultra-loose.
• However, the Bank of Japan surprised the markets, leaving monetary policy ultra-loose.

It was a busy start to the day on the economic calendar, with inflation numbers from Japan and the Bank of Japan in the spotlight.

Inflation numbers were hotter-than-expected, raising the prospects of a Bank of Japan tweak from ultra-loose. Overnight, news hit the wires of the Bank of Japan planning to tweak the Yield Curve Control (YCC) policy and allow 10-year government bond yields to breach a 0.5% cap on certain occasions. However, the Bank of Japan disappointed investors in search of a tweak.

This morning, the Bank of Japan left interest rates unchanged at -0.10%, aligned with market expectations. However, the BoJ did not tweak the Yield Curve Control Policy, restricting 10-year government bond yields within the +/- 0.50% range.

According to the Statement on Monetary Policy, the Bank voted 8-1 in favor of leaving the yield control policy unchanged.

USD/JPY Reaction to the Bank of Japan Monetary Policy Decision

Before the BoJ monetary policy decision, the USD/JPY fell to a pre-BoJ low of 138.708 before rising to a pre-BoJ high of 139.590.

However, in response to the Bank of Japan status quo, the USD/JPY fell to a post-decision low of 138.471 before surging to a post-BoJ high of 141.073.

This morning, the USD/JPY was up 0.23% to 139.747.

Up Next

Later this morning, investors should consider the Bank of Japan press conference. After holding monetary policy unchanged, Governor Ueda will likely have to field questions related to the Yield Curve Control Policy and inflation.

Looking ahead to the US session, it is another busy day on the economic calendar. US Core PCE Price Index and personal spending numbers will be the stats to track. Fed Chair Powell left the door ajar for a September rate hike. A hotter-than-expected core PCE price index and personal spending would support a more hawkish Fed policy outlook.

The Core PCE Price Index is the Fed’s preferred inflation indicator. Sub-4% would likely shut the door on the Fed hawks. However, personal spending needs consideration, with a pickup in spending likely to drive consumer price inflation through demand.