BOJ Governor Kazuo Ueda emphasized the importance of avoiding premature monetary policy tightening, to ensure that Japan can achieve its 2% inflation target on a sustainable basis. Ueda spoke with reporters at the bank’s headquarters in Tokyo in his first group interview since taking office in April. However, he also suggested potential adjustments to the Yield Curve Control (YCC) if the benefits and costs of the policy change.
The Governor outlined possible modifications to the YCC policy in the future, which can be done in various ways. One potential approach he mentioned is targeting bond yields in the 5-year zone instead of the current 10-year zone. But he said that it was not certain that the BOJ would do so, how likely this was to happen or under what conditions the BOJ would look at this option as needed.
As reported today, annualized inflation in Tokyo fell to 3.2% in May, lower than expected and below the y/y inflation reported in April, which hit 3.5%. On a monthly basis, Tokyo inflation fell by 0.1%. The Consumer Price Index (CPI) excluding fresh food increased 3.2% y/y and fell 0.1% compared to April. CPI excluding fresh food and energy rose 3.9% compared to May 2022 and grew 0.2% from April.
Asian equities traded mixed today, after inflation data in Tokyo showed a slowdown. The JPN225 looks to be not moving much, still trading below its previous high. Technically, a move to the upside could test the 31,350 peak and only a move above this level would confirm a continued bullish trend and invalidate the triple top pattern seen in major periods.However a move below the 30,395 minor support could be a starting point for a short term reversal, for the 30,000 round figure first, before testing the crucial 29,351 support.
Meanwhile, elsewhere ratings agency Fitch has placed the US credit rating on negative watch for a potential downgrade, amid fears of a lack of progress towards a US debt ceiling deal ahead of next week’s deadline. The USDIndex on Thursday gained +0.35% and posted a 2-month high. Thursday’s better-than-expected US economic reports on weekly jobless claims and Q1 GDP were hawkish for Fed policy and supported the Dollar. In addition, the surge in the 10-year T-note yield to a 2-month high reinforced dollar interest rate differentials and was bullish for the Dollar.
Today’s Core PCE report, as the Fed’s favoured measure of inflation, will be in the spotlight. A higher-than-expected reading will increase market expectations for another Fed hike, marking a very sharp contrast to the BOJ’s ongoing loose monetary policy.
USDJPY, D1 continues to rise within a bullish channel. The pair has now surpassed this year’s high and at the time of writing, the price has retreated slightly from the 140.24 reached in yesterday’s trading, near the 50% FR level of the October 2022 peak drawdown and January 2023 low.
A move above the recent high could test the 61.8% FR level (142.49). Technically, the bulls’ attempt to establish a trend is still validated by the 26-day moving average. RSI is at overbought levels and MACD is on track.
Looking back, the current price is below the low of the first intervention by the BOJ in September 2022. So this level is quite calculated, meaning that if the price fails to move further upwards and instead reverses downwards, it could foil the bulls’ plans. A break back below the bullish channel and the previous resistance turned support at 137.80 will remove the short-term bullish bias.
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Ady Phangestu
Market Analyst – HF Educational Office – Indonesia
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