FX comment – No change in weak JPY trend despite optimistic projections from BoJ

by: Roy Teo

  • BoJ maintains optimistic growth and inflation outlook
  • JPY to weaken due to divergence in monetary policy



BoJ maintains optimistic growth and inflation outlook

The BoJ projects that the economy is likely to grow above its potential (around 0.5% or lower) from FY 15 through FY 16. Private consumption is expected to accelerate its pace of increase due to improvement in the employment and income situation. Exports are also projected to increase moderately due to recovery in overseas economies and support from previous weakness in the yen. Looking ahead, the economy is likely to be affected by the sales tax increase in FY 17. Overall the current projections are more or less unchanged from the interim assessment in January 2015. Inflation is projected to be around 2% in the first half of FY 16, though the projected increase in inflation is somewhat lower.


JPY to weaken due to divergence in monetary policy

The JPY recovery after the BoJ outlook for economic activity and inflation announced at 3pm local time was temporary. We think that any strength in the yen is likely to be good opportunities for local life insurers to buy overseas assets with currency hedge ratios reduced. With inflation expected to reach the BoJ inflation target only in FY 16, the BoJ is expected to keep monetary policy very accommodative for a prolonged period. We think there is still a case for the BoJ to increase stimulus in July to stimulate the economy given that economic momentum has stalled recently. Despite disappointing US economic data in the first quarter of this year, we maintain our view that the US economy will recover in the second quarter and the Fed to begin its monetary tightening cycle in September this year. As a result the JPY is projected to weaken further later this year. We will release an updated yen forecasts later this week in our FX weekly publication on 1 May.