The Bank of Japan (BoJ) has recently signaled a potential shift in its monetary policy stance, as indicated by the minutes from its October meeting. There is a growing alignment with the conditions necessary for moving away from the era of negative interest rates. The bank’s updated forecasts suggest a rising inflation trajectory through to the end of 2025, which is edging closer to their long-standing 2% target.
However, the BoJ has set specific prerequisites for such a monumental shift in policy. These include not only the achievement of the inflation target in a stable and sustained manner but also the observation of increasing wage growth. Importantly, the bank differentiates between ‘cost-push’ inflation, driven by factors such as the recent energy crisis, and ‘demand-pull’ inflation, which is generated by heightened local economic activity.
Despite upward trends in wages and inflation, Governor Ueda of the BoJ has indicated that the goal is yet to be fully realized. Previously, Governor Ueda alluded to the possibility of having enough data by year-end to consider a move away from negative interest rates.
In preparation for this potential change, the BoJ is making adjustments to the local bond market, introducing greater yield flexibility. This strategy is aimed at mitigating market volatility in anticipation of the eventual normalization of interest rates.
In related news, the USD/JPY currency pair has experienced an uptick following the release of the BoJ minutes, influenced by the broader recovery of the US dollar. The level of 150 has been identified as a critical threshold that could prompt foreign exchange interventions by Tokyo. However, the market’s self-regulatory response to surpassing this level has thus far obviated the need for official action.
The Moving Average Convergence Divergence (MACD) analysis points to a decrease in momentum for the currency pair. Market observers are watching to see if a new annual high above the current level of 151.70 will bring a heightened sense of urgency to the policy discussion. Conventionally, the path towards policy normalization would be associated with a stronger yen, yet this trend has been conspicuously absent, sparking further debate among investors and analysts.
