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On the regular meeting of the Bank of Japan last week, the meeting of the members of the regulator was quiet and inconspicuous, especially against the background of loud Nonfarm and political battles regarding prospects on Brexit.
The yen also ignored the March meeting of the Central Bank as the USD/JPY pair showed only a modest surge in prices to the level of 111.92 but has already rolled back by 50 points lower on the same day, where it continued to rally. The bulls of the pair could not take advantage of the situation and break through the 112th figure, although such attempts have recently been made more than once. Meanwhile, Haruhiko Kuroda's rhetoric was too boring and the outcome of the meeting was too predictable, hence, the Japanese currency remained virtually in place as they wait for the next news driver. Waiting will not take long since we will find out the results of the Fed meeting today and then tomorrow, there will be an estimate on the dynamics of Japanese inflation. These fundamental factors are capable of shaking the pair, which is clearly stuck in a swamp of sluggish flat.
Returning to the March meeting of the Japanese regulator, it is worth recalling that on the eve of this event. There are rumors that Kuroda could expand the incentive program by increasing the purchase of government bonds, which were actively discussed on the market. Prior to that, he warned that the regulator would resort to such measures "if the economy and inflation lose momentum." Moreover, given the fact that the Japanese economy grew by only 0.3% compared to the third quarter, the realization of such a scenario where the forecasts of most analysts will not be reached was quite real. They predicted a growth of 0.4%.
However, such fears were not justified. The regulator only lowered the estimate of growth in key sectors of the country's economy, particularly in the production and export sectors. Compared to the January meeting, Kuroda's rhetoric noticeably softened but the regulator only warned about growing external risks for the economy. Also, the Bank of Japan has traditionally expressed concern about the dynamics of inflation.
Inflation in Japan is indeed growing at a rather weak pace. the consumer price index has been declining since October last year, while core inflation, excluding the cost of fresh food, has been trampling in the range of 0.8% -1% for more than a year still far from the target level of 2%. According to a report published by the Bank of Japan, "some representatives of the Central Bank" expressed concern that the target level would remain unattainable for another three years, that is until 2021. Although the report does not indicate which members of the regulator are talking about and who shares their opinions, it should be noted that where there are 7 members of the board voted to keep the rate at the current level while two were against it, according to the results of the meeting.
All of these suggest that further inflationary dynamics will determine the mood of the Japanese regulator. If core inflation drops below 0.7%, the probability of monetary policy easing will increase in many ways, even despite the sluggish growth of the oil market but thanks to which, the Japanese inflation reached its local maxima last year. This why tomorrow's release may cause significant volatility in the USD/JPY pair, especially if it goes beyond the forecasts.
According to the general expectations of experts, the consumer price index will stop the decline and recover to the December level, which is to the level of 0.3%. Yet, the core inflation indicator remains at the last month level of 0.8%.
It should be immediately noted that predicted values are rather weak. Therefore any even the smallest deviation to the downside will be perceived by the market quite painfully, especially if the core inflation fails to reach 0.7%. Yet, a slight excess on the forecast levels is unlikely to cause special delight among traders. Inflation is still too far from the target levels, hence, either a strong inflation spurt or a many-month upward trend will help the yen. In all other cases, the reaction in the USD/JPY pair will be minimal.
It is also worth recalling that tomorrow's release on the growth of Japanese inflation will take place after the March meeting of the Fed and the results of which will be announced tonight. Therefore, it is not expedient to open transactions from the current USD/JPY positions. the dollar can change the fundamental background for a pair and it is rather difficult to predict its reaction. If Fed members follow the most anticipated scenario, involving a single rate hike this year and Powell's low-key rhetoric, then greenback can strengthen its position in the market. However, alternatives are not excluded. For example, the Fed may finally abandon the tightening of monetary policy this year and/or even assume the likelihood of easing. Also, the regulator can reduce the upper limit of the range of the neutral rate. All these dovish scenarios will cause strong volatility.
Thus, it is advisable to make a decision in the USD/JPY pair following the upcoming events. The Fed was able to pull the pair towards the base of the 110th figure and weak Japanese inflation can redraw the fundamental picture and then return the price back again. Only a cumulative assessment of the situation will determine the course.
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