The Yen traded slightly lower against the Dollar early on Thursday after the BoJ kept interest rates on hold and pushed the deadline for it to reach its inflation target for another six months. As widely anticipated the central bank kept key policy rates at -0.1% and a 10-year government bond yield target of around 0%.
The Yen’s losses were limited as the BoJ raised its GDP forecast slightly for the current and next fiscal year, but it is becoming obvious that Japan’s policy makers are not willing to join the tightening course followed by other central banks. The BoJ has pushed back the inflation target for the sixth time since announcing the expansion of asset purchases in April 2013. Now they expect the 2% target will be reached in 2020, given that there is no more postponement. This indicates that the BoJ will be the last central bank to tighten its policy, thus keeping the Yen under pressure.
Traders are more interested in ECB’s meeting today. Despite the central bank being expected to keep policy unchanged, every single word will be closely scrutinized from President Mario Draghi. The Euro has already appreciated by 3% since Draghi hinted on June 27 that the ECB could adjust its policy tools as economic prospects improve. However, ECB policy makers were fast to claim that markets misunderstood their Chief, as markets continued to buy the single currency. Today he will be given another chance to elaborate on his previous statements.
Given the improvement in the Eurozone economy, Mr. Draghi is in the same boat as Yellen, Poloz and Carney. The QE program expires by end of this year and the recent selloff in European bonds suggests that the €60 billion bond buying rate per month, is about to get reduced. Today’s €60 billion question is, how can the central bank signal reduction in the program without tightening financial conditions?
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The last thing the ECB wants is a strong Euro and tightened financial conditions for now. It is a complicated process to start normalizing policy without disrupting markets, so while Draghi wants to prepare investors for a gradual wind-down of asset purchases, he is likely to hint that the pace will be gradual and easing options will remain open. The trickiest part is how to deliver a confident message without leading to further selloffs in bonds and stocks and additional appreciation in the Euro. Even if today’s statement seems more dovish, I would still prefer to buy the Euro on dips then selling on rallies.