Why is Bank of Japan Still Dovish Amid a Cast of Hawks?

June 21, 2022 10:43

The Bank of Japan appears to be the last dove amid a cast of hawks made up of the Federal Reserve, Bank of England, Reserve Bank of Australia and, more recently, the European Central Bank and the Swiss National Bank.

The question is, why? BoJ has been in the habit of managing deflation with accommodative monetary policy for so many years that its focus will take time to shift to the new reality. The dovishness is bordering on extremes. The central bank’s recent 10.9 trillion Yen government bond purchase is the largest on record, diverging sharply from the Federal Reserve’s decision to end quantitative easing. The BoJ may end up contributing to inflation and passing the costs onto Japan’s economy which now has to perform better to justify the boost in liquidity.

Is the BoJ managing the risks better compared to its US counterpart? The inflation rate in Japan is considerably lower than in the US. Headline inflation for April was 2.1 percent, relatively low compared to North America, where crude oil prices have heated up costs in the supply chain. Japan’s latest inflation data for May is set for release on June 24, when the BoJ may be looking at a different and riskier scenario.

The BoJ has to solve contradictory economic trends: higher inflation calls for higher interest rates, yet lower post-COVID growth calls for accommodative monetary policy. The central bank’s minutes are due out later today, with more insights into the current thinking.

Canada Retail Sales

Trading news headlines from Canada are out today with the release of Retail Sales for April. Retail sales are expected to have risen from zero to 0.8 percent, and any surprises could move the CAD currency pairs. Inflation is running high in Canada, meaning that consumers may restrict their spending on retail items. Weaker retail sales may erode overall GDP performance, so this report is an important one to watch.

UK inflation rate

The UK releases the latest all-important CPI data on June 22. The annual inflation rate is expected to have risen to 9.1 percent for May compared to the previous level of 9 percent for April. If the actual result is higher-than-expected, the GBP currency pairs may see volatility.

Quick tip

What are central bank minutes?

In addition to their headline interest rate decisions and monetary policy statements, central banks release a copy of their minutes, which reveal the results of discussions about the economy. Current economic thinking is an important factor influencing future monetary policy decisions. Often, the world’s media pick up a word that symbolizes the current thinking, such as ‘patient’ (Australia) or ‘tapering’ (US).

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Sarah Fenwick
Sarah Fenwick Financial Writer, Admirals London

Sarah Fenwick's background is in journalism and mass communications. She has worked as a correspondent covering Swiss Stock Exchange news and written about finance and economics for 15 years.