At this week meeting, the Bank of Japan reiterated its ultra-easing monetary policy stance and reduced both growth and inflation forecasts. Although USD/JPY has backed away from its recent highs in the 114.70 area, interest rate differentials have left the currency pair elevated, explained analysts at Rabobank.  

Key Quotes: 

“The Bank has described that it will be paying attention price risks.  These include the possibility of pass-through of cost increases to selling prices and secondly to “future developments in foreign exchange rates and international commodity prices, as well as the extent to which such developments will spread to import prices and domestic prices”.  While there was no suggesting as to what action the BoJ may take if these risks lead to inflation deviated from its central scenario, the BoJ did underline the risk the exchange rate/commodity price risk suggesting that this is being very closely watched.”

“This may be a warning to the market that in view of the inflationary implications the BoJ is not entirely happy with the JPY’s position at the worst performing G10 currency in the year to date. This signal may be sufficient to limit upside potential for USD/JPY near-term, particularly since the weakness of US Q3 GDP data has also undermined the greenback today.  We retain a 3 month USD/JPY forecast of 112.”