The Bank of Japan on Tuesday will announce the results of its first meeting this year. In anticipation of this event, the dollar-yen pair is showing sideways movement, reflecting the indecision of both buyers and sellers. After an unsuccessful attempt to breach the resistance level of 148.80 (upper Bollinger Bands line on the daily chart) last week, traders have settled into a drift. However, Tuesday's events may "stir up" the pair.
On the one hand, the outcomes of the January meeting are predetermined. All parameters of monetary policy will remain as before. The likelihood of this scenario is 100%. Most likely, the pair will ignore the announcement of the formal results of the January meeting. All attention will be on the text of the accompanying statement and the rhetoric of Bank of Japan Governor Kazuo Ueda.
The regulator may unambiguously indicate that it will not change its ultra-loose course of monetary policy in the foreseeable future. There are two reasons for this decision: inflation and wages.
For instance, Japanese unit labor costs (total income of wage earners in the form of wages) decreased in November to 0.2% year-on-year, while in the previous month, this indicator increased by 1.5%. The figure demonstrated the weakest result since January 2022. Real wages in Japan fell by 3% compared to the previous year. These figures indicate quite difficult conditions for workers in terms of their purchasing power.
Meanwhile, inflation remains above the Bank of Japan's target, although it shows a downward trend. According to data published last week, the overall consumer price index in December was at 2.6% year-on-year, matching the forecasts of most experts. The indicator shows a downward trend for the second consecutive month (for comparison, in October, it was at 3.3%). December's result is the weakest since July 2022.
The consumer price index, excluding fresh food prices, rose last month by 2.3%, which is also a multi-month low—the weakest growth rate of the indicator since June last year. Note that this component of the report is particularly closely monitored by the Japanese regulator. Another indicator—the consumer price index excluding food and energy—was at 3.7% year-on-year in December. This is the lowest value of the indicator since January 2023. It is also worth noting that this component has been consistently declining for the fourth consecutive month.
Inflation continues to overshadow the effectiveness of wage increases. The Japanese government has already called on businesses to raise wages, but the annual negotiations between employers and unions will only take place in April.
According to former Bank of Japan executive Kazuo Momma, the likelihood that the target (a two percent increase in consumer prices) will not be achieved is quite high. Therefore, the Japanese regulator may entirely forgo the normalization of monetary policy this year. "The probability that the Central Bank will firmly convince itself of the sustainable nature of wage growth is about 20-30%," said Kazuo Momma. However, if the situation after the "spring offensives" (as the annual wage negotiations in Japan are called) allows for a shift to policy normalization, it is highly likely that the first step in this direction will not be taken until summer this year.
It is worth noting that as of late last year, the market still held hopes for the recalibration of the Bank of Japan's monetary policy, especially since the central bank representatives had hinted at such a possibility. On the wave of hawkish hopes, the yen strengthened against the greenback to the base of the 140 figure. However, after the members of the Japanese regulator "sobered up" the market participants, the USD/JPY pair jumped almost 800 points, approaching the borders of the 149 figure.
This price level proved too challenging for buyers. But following the January meeting, traders might not only overcome the 149.00 target but also approach the borders of the 150 figure. This is a kind of "red line," after which the market will live in fear/anticipation of currency intervention. But the path to the 150.00 mark is virtually open. If the Bank of Japan confirms its current course and refutes rumors of monetary policy recalibration (in the near future), USD/JPY buyers will easily make a 200-point price leap. Judging by previous statements and macroeconomic reports, this scenario is the baseline. The main targets of the upward movement are 148.80, 149.50, and 150.00.