Bank of Japan Signals Cautious Path Toward Further Rate Hikes Amid Yen Weakness 
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The Bank of Japan (BoJ) left its monetary policy unchanged yesterday. Followed by an accompanying statement it appeared optimistic as regards the growth outlook.
Owing to rising energy prices the BoJ expects a rise in inflation rates. At some point - the exact timing remains unspecified - inflation will rise to the 2% target according to the BoJ, mainly as a result of rising inflation expectations.
At currently 0.4% YoY the rate of inflation remains, though. Let’s wait and see whether the BoJ’s hopes turn out to be correct.
What matters for the BoJ now is that JPY does not appreciate further. Of course, Ms. Yellen’s steps proved a disservice as USDJPY eased from approx. 115 to just about 113.
However, as long as this development does not progress any further and long-term interest rates in Japan do not rise in line with the US yields the BoJ will not have to take action.
As a more harmonic U.S.-Japan relationship and a more aggressive Fed stance would mitigate downside risks to USDJPY to some extent, we revised USDJPY forecasts for end-June, end-September, and end-year to 111, 108 and 105 from 105, 102 and 99 respectively. We target 105 at end-March next year.
As the new profile suggests, however, we think factors mentioned above would not be influential enough to get USDJPY on a solid upward path heading to 120 or even higher, and still, expect it to track a modest downward trend in the medium-term.
