Three scenarios and their implications for USD/JPY – TDS

Economists at TD Securities discuss the Bank of Japan (BoJ) Interest Rate Decision and their implications for the USD/JPY pair.

Shift in Yield Target to the front-end (10%)

A shift in the Yield Target to the front-end (2y/5y) implies a big shift in the BoJ’s easing stance. The Bank is likely to upgrade its FY24 inflation forecast above 2% and cite evidence that inflation expectations are nearing its 2% inflation equilibrium. Further, the BoJ is likely to emphasize that the economy is likely to run above potential (positive output gap) at a much faster pace than expected and bring about stronger price pressures. USD/JPY -3.0%.

Widening the 10yr Yield Target Band (25%)

BoJ could widen the band from the current 50bp range. The Bank upgrades its FY2024 inflation forecast above 2%, citing that the balance of risk has tilted towards a higher inflation outcome which supports a gradual tweak to the YCC framework. At the last Summary of Opinions, members highlighted that firms pricing behaviour have clearly changed, which suggests a shift in corporate wage-price setting behaviour after firms offered the biggest wage hikes in 30 years. USD/JPY -2.5%.

Base Case: No change to policy settings (65%)

BoJ keeps all policy settings unchanged and Governor Ueda reiterates the BoJ’s stance that there is still some distance to achieve its 2% inflation target. This should likely be clear from the FY24 inflation forecast which we expect to be left unchanged at 2% given the uncertainty over the inflation outlook, especially on the demand side. The BoJ would take its time to assess the wage outlook and avoid any premature shift in its YCC policy, especially when the Bank has planned for policy review workshops with foreign experts in Dec’23. USD/JPY -0.5%.