BoJ plays the long game

JPY: Ueda launches policy assessment with policy unchanged

The BoJ announced an unchanged monetary policy stance this morning and announced a policy assessment that could take up to a year and-a-half to complete. The yen has weakened as you would expect although some of this sell-off may also reflect the higher yields in the US and the strong 2% bounce in the S&P 500 in response to positive earnings news. We remain unconvinced that this move higher in USD/JPY will be sustained and would be more inclined to fade the move.

We would certainly not link the length of time the assessment may take to a signal of there being no change in monetary policy over the same period. The assessment has been launched in the context of a much bigger picture – Japan falling into deflation in the 1990s and the “challenge” for the BoJ in achieving price stability over that period. Certainly we are unlikely to get a profound shift in strategy by the BoJ over that period but we wouldn’t view this as a commitment to keep YCC over that period of time. It is also worth stating that YCC as a policy framework is set to diminish in importance. It was hugely powerful in 2022 as global yields surged but will far less meaningful this year as global inflation and long-term yields fall further. Removing YCC when it is less relevant is the ideal scenario for the BoJ and we still see that opportunity presenting itself later in the year as inflation globally falls further, the US falls into recession and yields decline. Last week we signalled a push-back in the timing of the removal of YCC to July at the earliest and it is feasible it could be further back than that but where global yields are will be the key determinant not where inflation in Japan is.

The projections today from the BoJ certainly do not suggest an imminent need for tighter policy. The 2023 and 2024 forecasts were raised for nationwide core CPI, by 0.2ppt to 1.8% and 2.0% respectively. However, the new 2025 forecast was put at 1.6% and the BoJ stated that there were downside risks to that forecast. The core-core projections were 2.5%; 1.7%; and 1.8% - so progress on a core-core basis but not quite at target levels to justify a change in policy.

The BoJ did change its rate guidance but that has not had much influence on the markets. Perhaps that’s because the change is understandable. The guidance paragraph mentioned “monitoring the impact of covid” and finished with the rates being at their present level “or lower”. That guidance was dated. But still, in time the markets may view this change as at least opening up more options for the BoJ if required.

The bounce in USD/JPY is not surprising. There is no sense in the statement and forecasts of any imminent change in policy. We await to hear from Governor Ueda now. The bounce in USD/JPY of course also reflects US developments overnight and the prospect of a rate hike by the FOMC next week. We have less confidence of the US side of USD/JPY remaining supportive and hence do not see this move higher in USD/JPY as being sustained.

USD/JPY OVERSHOOTING RELATIVE TO DXY

Source: Bloomberg, Macrobond & MUFG GMR

USD: Real GDP in Q1 decelerates further

Short-end yields in the US jumped yesterday with the 2-year UST note yield up 12bps and heading for an overall modest gain in the month of April. There were two factors behind this. Firstly, the fears over the US banking sector that have re-emerged eased a touch with First Republic shares rallying back after days of large decline. The share price closed up 9% while the KBW Regional Bank Index increased 2.1%. However, Fed balance sheet data last night saw an USD 11.3bn increase in the usage of liquidity windows available for banks so confidence clearly remains fragile.

Secondly, we had the Q1 real GDP data released yesterday and this release had a very clear impact in lifting yields. The overall 1.1% Q/Q SAAR gain was a little weaker than expected but it seems the markets were more focused on the inflation print. The core PCE Price Index accelerated from 4.4% to 4.9%, above the consensus 4.7%. The consensus for the March MoM gain today is 0.3% so the risks are to the upside based on the Q/Q data although upward revisions to January or February could still see a consensus gain today. That would help ease the inflation angst from yesterday.

Upward revisions to earlier in the quarter would certainly be a similar pattern to what happened in Q1 with consumer spending. The Q/Q increase was 3.7% but all of that strength was in January. Real consumer spending fell 0.1% in February and is expected to fall 0.1% in March as well. Business investment also fell 7.3% after declining 3.5% the previous quarter. While final sales to domestic purchasers increased 2.9% Q/Q from 0.0% in Q4, as with consumer spending, the strength was in January and the momentum of the economy points to recession risks ahead. The Fed will no doubt cite the core inflation in hiking next week but the momentum suggests to us that another rate hike is not necessary.

So this US dollar rebound is unlikely to last. The appetite to continue selling the dollar will likely be dampened next week with the FOMC meeting and the NFP data on Friday – two event risks that will shape sentiment on the dollar after that

CLEVELAND FED RECESSION PROBABILITY INDICATOR

Source: Macrobond & Bloomberg

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
SZ	08:00	KOF Leading Indicators	Apr	98.1	98.2	!
GE	08:55	German Unemployment Change	Apr	10K	16K	!!
GE	08:55	German Unemployment Rate	Apr	5.6%	5.6%	!!
IT	09:00	Italian GDP (QoQ)	Q1	0.2%	-0.1%	!
IT	09:00	Italian GDP (YoY)	Q1	1.4%	1.4%	!
SZ	09:00	SNB Chairman Thomas Jordan speaks	--	--	--	!!
NO	09:00	Unemployment Rate n.s.a.	Apr	1.80%	1.80%	!
EC	10:00	GDP (QoQ)	Q1	0.2%	0.0%	!!!
EC	10:00	GDP (YoY)	Q1	1.4%	1.8%	!!
GE	13:00	German HICP (YoY)	Apr	7.8%	7.8%	!!
GE	13:00	German HICP (MoM)	Apr	0.8%	1.1%	!!
US	13:30	Core PCE Price Index (YoY)	Mar	4.5%	4.6%	!!!
US	13:30	Core PCE Price Index (MoM)	Mar	0.3%	0.3%	!!!
US	13:30	Employment Cost Index (QoQ)	Q1	1.1%	1.0%	!!!
US	13:30	Personal Income (MoM)	Mar	0.2%	0.3%	!
US	13:30	Personal Spending (MoM)	Mar	-0.1%	0.2%	!
US	13:30	Real Personal Consumption (MoM)	Mar	-0.10%	-0.1%	!!
CA	13:30	GDP (MoM)	Feb	0.2%	0.5%	!!!
US	14:45	Chicago PMI	Apr	43.5	43.8	!!
US	15:00	Michigan 5-Year Inflation Expectations	Apr	--	2.90%	!!
US	15:00	Michigan Consumer Sentiment	Apr	63.5	63.5	!!
US	15:00	Michigan Inflation Expectations	Apr	--	4.6%	!!

Source: Bloomberg