BREAKING: Yen retreats after Kuroda comments

The head of the Bank of Japan, Haruhiko Kuroda, talked about monetary policy during the World Economic Forum in Davos, although his rhetoric remains unchanged:

• Japan has not yet reached a stable 2% long-term inflation target

• Inflation will start to fall below 2% from February, which is why the BoJ does not decide to change its policy

• The labor market is tight, wages will start to grow, which will allow to stabilize inflation

• Kuroda emphasizes that his policies have saved Japan from sharp deflation

• The last decision to increase the fluctuation range for 10-year bond yields was not a mistake, it was related to the proper functioning of the debt market

As one can notice, no changes in the BoJ's policy are expected in the near future, unless the market forces the central bank to do so by significantly exceeding the yield on 10-year bonds, or significantly exceeding the lower tenor yield. It is worth noting, however, that Kuroda predicts wage increases, which may suggest that sooner or later, (most likely after leaving his post in April), BoJ policy may be adjusted.

We are currently seeing a significant weakening of the yen against other major currencies. However, the Fed's opinion on the future of monetary policy will also play a significant role. The Fed is starting to notice a sharp slowdown of the economy. Braindard suggests the Fed will have to assess what "damage" has been done by the recent hikes. Of course, Brainard is known for her dovish stance, but it cannot be ruled out that Fed hikes will reach 5% (although some suggest only 25 bp and a hold). If the Fed makes a turnaround in February or March, USDJPY may resume a downward move.