The Bank of Japan (BOJ) has announced its decision to hold interest rates at 0% to 0.1% and revealed plans to trim its bond purchases. The BOJ did not provide specific details of its tapering plans until the July meeting, indicating a gradual adjustment of monetary policy. The yen initially fell in response to the BOJ's dovish stance, but it has since recovered [8683e7e2].
The decision to maintain the current interest rates comes as a surprise to the market, as there were expectations of a reduction. However, the BOJ stated that it will lay out details of its tapering plan for the next one to two years at its July policy meeting [fceb05de].
The yen's depreciation is attributed to the interest rate divergence between the US and Japan, as well as the robust US jobs data for May, which has reduced the odds of a Fed rate cut in September. The yen is also influenced by the performance of the Japanese economy, the differential between Japanese and US bond yields, and risk sentiment among traders [fceb05de].
The weak Japanese economy, characterized by a contraction in GDP and household spending, may delay any plans for the BOJ to tighten policy. The BOJ's dovish stance reflects concerns about the state of the economy and the need for continued monetary support [8683e7e2].
On Friday, July 5, household spending numbers from Japan could be pivotal to the July Bank of Japan monetary policy decision. With the USD/JPY tied to the 161 handle, comments from the Bank of Japan and the Japanese government also need consideration. Economists forecast household spending to increase by 0.5% in May, following a 1.2% decline in April. The Bank of Japan could tighten monetary policy to bolster the Japanese Yen [2be37c03].
In the US, the crucial US Jobs Report may impact the Fed interest rate trajectory. Economists forecast average hourly earnings to increase 3.9% year-on-year in June after rising 4.1% in May. A hotter-than-expected US Jobs Report could sink bets on a September Fed rate cut and leave the US dollar in the driving seat [2be37c03].
Bank of Japan commentary will be closely watched as the USD/JPY hovers around the 158 level. Recent economic indicators supported the BOJ's decision to leave interest rates unchanged, but the lack of commitment to hiking interest rates in the near term has dampened buyer appetite for the Japanese yen. BOJ Deputy Governor Ryozo Himino recently spoke about the impact of a weaker yen on the economy, stating that exchange-rate fluctuations affect economic activity and inflation in a broad-based and sustained way. The BOJ may wait for inflation and services PMI numbers before considering its next steps. Investors should monitor BOJ commentary, as well as US labor market and manufacturing sector data, which could influence market sentiment and expectations of a Fed rate cut [ea8301f1].
The near-term trends for the USD/JPY will hinge on BOJ chatter, inflation numbers from Japan, and services PMIs from Japan and the US. An increase in service sector activity in Japan and inflation figures exceeding expectations could prompt the BOJ to consider initiating rate hike discussions [ea8301f1].