Key Insights
- BoJ lowered 2023 core inflation outlook to 2.4% but said likelihood of hitting target has “gradually risen”.
- Upgraded inflation view boosted expectations of BoJ rate hike as early as April, with 50% probability priced in.
- Yen got temporary boost from report, but USD/JPY still seen driven by dollar, upcoming US data like core PCE and Fed policy signals.
TOKYO – The Bank of Japan said on Tuesday that consumer inflation is likely to increase toward its 2% target, in a slight tilt towards policy tightening after years of heavy money printing failed to accelerate price growth.
In its quarterly outlook report, the BOJ lowered its core consumer inflation forecast for fiscal 2023 to 2.4% from 2.8%, but said the “likelihood of realizing this outlook has continued to gradually rise.”
The upgraded price outlook boosted expectations the BOJ could raise interest rates as early as its April meeting, with markets pricing around a 50% chance of a hike based on interest rate probabilities.
The report propped up the battered Japanese yen briefly, though analysts said the U.S. dollar and upcoming economic data points would remain key drivers for USD/JPY.
The currency pair has pulled back from 148.80 last week and hit a low of 147.00 on Tuesday as yen strength combined with some U.S. dollar softness. But USD/JPY remains supported above the psychologically important 145 level for now.
Options indicators suggest traders have been paying for protection against further yen strength. But overly bearish positioning also indicates the currency could squeeze higher if the BoJ indeed drops its ultra-loose policy.
Much depends on whether the U.S. Federal Reserve signals an earlier rate cut than expected at next week’s policy meeting. But for now, BoJ’s latest outlook offers a tentative step towards policy normalization in Japan after years of heavy money printing failed to accelerate inflation.