The Japanese Yen (JPY) continued to trade at weaker levels ahead of the Bank of Japan’s policy update on Tuesday. Economists at MUFG Bank analyze the yen’s outlook.
The yen’s performance will be driven by updated guidance from the Bank of Japan
It now seems unlikely that the Bank of Japan will raise interest rates and/or adjust YCC policy settings again once its policy meeting is on Tuesday.
Moreover, the recent earthquake in Japan has created more uncertainty making it unlikely that the cautious Bank of Japan will make such an important decision to exit negative interest rates until it has more clarity on its impact on the economy.
With market participants now anticipating no change in the Bank of Japan’s policy this week, the yen’s performance will be driven by the updated guidance from the Bank of Japan. The Japanese yen could weaken further if the Bank of Japan does not provide a stronger signal indicating the possibility of raising interest rates at its March or April meetings. One potential bearish catalyst for the yen would be if the Bank of Japan cuts core CPI forecasts although this is not our base scenario.