Summary:

• Bank of Japan leaves the monetary policy settings unchanged and scraps the time frame for hitting inflation aim
• Japanese data looks mixed while Tokyo inflation slows down substantially
• USDJPY could continue grinding higher in the short-run, where to target?

The Bank of Japan left its short-term interest rate at -0.1% unchanged as well as its target for the 10Y yield close to 0% in line with expectations. However, the bank also decided to scrap its time frame for hitting its 2% inflation goal admitting that it could take much more time. The statement turned out to be more dovish as well as the bank underlined downside risks to the economic and outlook from 2019 onwards. It also said that momentum for striking the price target is sustained, but it lacks steam nevertheless it stressed that inflation is still likely to accelerate towards 2% as the output gap closes and inflation expectations slowly but surely grind higher. The bank singled out a planned hike of sales hike next year among risks to the economic outlook raising hopes the government could defer it once again. In terms of macroeconomic forecasts the BoJ revised this fiscal year CPI projection to 1.3% from 1.4% leaving the estimate for the 2019/2020 fiscal year at 1.8% and adding the new forecast for the 2020/2021 period at 1.8% as well. The GDP projections were little changed too, and for this fiscal year it was bumped up to 1.6% from 1.4%, for the 2019/2020 fiscal year raised to 0.8% from 0.7% and for the 2021/2020 was set at 0.8%.

More subdued Tokyo inflation portends a slowdown for the national gauge scheduled to release next week. Source: Bloomberg

Apart from the Bank of Japan meeting there was a plethora of macroeconomic readings which did not change too much. First and foremost, Tokyo inflation for April came in well below expectations implying a slowdown for the national price indicators due next week. Annual headline CPI slowed down to 0.5% from 1% falling short of expectations at 0.8%, the core (excluding fresh food) shrank to 0.6% from 0.8% vs. 0.8% projected, and the super-core (excluding fresh food and energy) ticked down to 0.3% from 0.5% while economists surveyed by Bloomberg had anticipated no change.

On top of this, retail sales for March slid 0.7% mom missing the forecast at 0% mom taking the annual pace of growth down to 1% from 1.7% previously. Industrial production along with the labour market proved to be a brighter spot as the former grew 1.2% mom beating the median estimate at 0.5% mom while the unemployment rate stayed untouched at 2.5% in March. On the face of it, it implies that the jobs market has already become tight enough to spur higher wage growth, but it has yet to materialise.

A revival of the US dollar has pushed the USDJPY back above 109, and it looks like the pair could continue moving higher in the short-term eyeing 111. It’s worth also noting that the option market has recently implied a bounce toward a 110 handle therefore a bit larger move could be on the cards as well. Source: xStation5