USD/JPY has edged upwards in the Wednesday session. In North American trade, the pair is trading at 112.40. Japanese banks are closed for Greenery Day. On the release front, BoJ Core CPI disappointed with a decline of 0.1%, short of the forecast of 0.2%. In the US, ADP Nonfarm Payrolls fell to 177 thousand, very close to the forecast of 178 thousand. The ISM Non-Manufacturing PMI improved to 57.5, beating the estimate of 56.1 points. Today’s key event is the Federal Reserve’s policy statement, with no change expected in the benchmark interest rate. On Thursday, the US will release unemployment claims.
Japanese inflation continues to underwhelm, and BoJ Core CPI was soft, posting a rare decline. A year ago, the indicator posted a solid gain of 1.1%, but since then consumer inflation has steadily weakened. The BoJ released its minutes from the March meeting last week, and policymakers focused on consumer inflation, which remains well below the central bank’s target of two percent. The minutes indicated that the BoJ will closely track consumer prices, but in the meantime will continue with its quantitative easing scheme, in which the central bank purchases JPY 80 trillion per year. The BoJ’s prescription for curing weak inflation is to continue its ultra-accommodative monetary policy, so we’re unlikely to see policymakers contemplate tightening policy unless inflation moves reverses direction and moves upwards.
All eyes are on the Federal Reserve, which holds its monthly policy meeting on Wednesday. A rate hike is extremely unlikely, with the CME Group pricing in a hike at just 5%. This means that the markets will be focusing on the rate statement and the views of policymakers concerning economic conditions. The Fed has two key goals which have been achieved, namely full employment and an inflation rate of 2%. One area of concern which policymakers have circled is the Fed’s balance sheet, which stands at $4.5 trillion. The minutes of the March meeting stated that policymakers want to start reducing this figure before the end of 2017, so the markets will be looking for another reference to the balance sheet in the rate statement or the minutes of the meeting. The markets are fairly confident that the Fed will press the rate trigger in June, as the odds for a hike have improved to 63%. If the rate statement is more hawkish than expected, we could see these odds increase.