Bank of Japan Monetary Policy Update for January 2015

Bank of Japan left its monetary policy unchanged and threw no surprises in what seems like a critical week for the currency markets.

The inflation expectations, as widely discussed saw the BoJ lower its forecasts while announcing the BoJ’s new measures on extension of its loan facilities. The loan facilities, which works similarly to the BoE’s “Funding for lending scheme” is targeted to banks and financial institutions, easy access to loans to help support the economy lending. The facility, which the BoJ calls as “Growth supporting funding facility”, which was due to expire in March 2015 has been extended by a year while also expanding the minimum amount outstanding from 7 trillion Yen to 10 trillion Yen.

The BoJ left its QQE program unchanged at 80 trillion Yen while expecting the CPI inflation rate to continue to be softer for most of this year. Inflation for the year starting April is expected to slow down to 1% growth, down from 1.7% previously forecasted, according to the BoJ’s statement. However, the upside coming from the fact that the Central Bank expects the Japanese economy to expand by 2.1%, up from 1.5% as previously forecasted.

The BoJ followed up with a press conference after the statement, with the main highlights being:

• Consumer inflation expected to reach 2% in the fiscal year 2015/2016
• CPI outlook revised downwards for the year 2015 (from 1% to 1.7%)
• Some BoJ members were more cautious on the CPI outlook
• BoJ will continue QQE for “as long as necessary” to achieve the inflation target of 2%
• BoJ will adjust policy as appropriate considering both upside and downside risks
• Falling oil prices will help push inflation in the longer term by improving economic activity
• Output gap is expected to improve as the economy grows above its potential
• Inflation expectations remain intact on the whole
• Change in deflationary mindset of the people starting to change
• Meeting the 2% inflation target may come sooner or later, subjective to Oil prices
• No change to inflation expectations of 2% in/around 2015
• Short term inflation expectations likely to be lower

Overall, the Bank of Japan has opted not to surprise the markets this time around. With no change to its policy and a downward revision of the inflation expectations, the markets did not react much as the changes were widely expected.

The Japanese Yen continued to strengthen, a theme which we have been constantly mentioning since the last few weeks ahead of the uncertainty with the ECB’s monetary policy tomorrow (22^nd January).

The USDJPY broke below 117.5, from yesterday’s highs of 118.87. We expect the Yen to strengthen in the near term; at least until the ECB’s monetary policy followed by the weekend Greek elections will see a flow of capital to the Yen, safe haven.

Today’s other major events include the Bank of England’s monetary policy vote count followed by the Bank of Canada’s monthly monetary policy outlook.