Bank of Japan monetary policy meeting minutes released; Yen loses steam; Japan’s economic data exceeds expectations.

The Bank of Japan recently released its monetary policy meeting minutes, in which policymakers discussed forms of making their monetary stimulus measures more sustainable.

One member suggested adjusting the bank’s purchase of risky financial assets, while others discussed how to achieve the bank’s 2 percent inflation target.

Most members agreed that the bank’s steps to ease corporate funding channels are having the intended effects and that the institution shouldn’t hesitate to do whatever is needed to deal with the spread of the coronavirus.

So far, 200,658 COVID-19 cases have been reported in Japan, as well as 2,944 total deaths. Cases have been surging, with medical experts sounding the alarm due to the quick advance of the virus. Despite this, the prime minister reiterated that there is no need to call for a state of emergency.

“We need to show the results of our coronavirus countermeasures,” said the prime minister during an interview. “I’ll spearhead the effort with a mindset to do everything that must be done.”

The last time the bank met, the monetary policy committee decided to leave the short-term cash rate unchanged at -0.1 percent.

Economic Calendar

The markets have not learned much about the current state of the Japanese economy this week.

The Cabinet Office reported that the Leading Economic Index for October stood at 94.3, after being at 93.3 in the previous month and higher than expectations of 93.8. The Coincident Index was lower than expected at 89.4, after being at just 84.8 in the previous month.

On Friday last week, the Bank of Japan announced its decision to leave the cash rates unchanged at -0.1 percent, remaining in line with analysts’ expectations.

Japanese Yen Loses Steam

So far this week, the Japanese yen has lost 0.10 percent against the US dollar, breaking a two-week gaining streak. Meanwhile, the dollar has been gaining ground against a bundle of its main competitors and recovering from the previous week’s losses, advancing 0.49 percent after a 1.06 percent decline.

The relative strength of the yen is concerning Japanese policymakers, who are clearing the path for a foreign exchange market intervention. Exporters need the exchange rate to stay at around 100 yen per dollar.

“Make sure the yen-dollar exchange rate does not cross the 100 yen mark,” Prime Minister Yoshihide Suga told Finance Ministry officials.

Despite the government doing what it can to avoid this situation, analysts expect the yen to break this barrier at some point, especially given the recent weakness of the US dollar.

“Strength in the U.S. economy and Japan’s years of monetary easing have prevented adjustments, but the yen’s advance may pick up a bit next year given the state of the U.S. and its monetary policy stance,” said an analyst at State Street.

Japan’s Economic Numbers Better Than Expected

Numbers are favoring the Japanese economy, which has largely outperformed analysts’ expectations. Economic growth surged in the third quarter, gaining 5.3 percent against forecasts of a 5.0 percent increase, but remained below the second quarter’s 7.9 percent.

The Consumer Price Index also surprised analysts, gaining 1.2 percent annualized and remaining unchanged from the previously released figure. In monthly terms, the index climbed by 0.2 percent, also remaining unchanged from the previously released figure but higher than forecasts of 0.1 percent.

Unemployment levels have also improved with a current rate of 6.7 percent after the previous month’s 6.9 percent, and better than expectations of 6.8 percent.

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With New Year’s Day next week, not many relevant releases are expected, aside from industrial production data for November, which will be released on Sunday.

ECB disavows any fiscal tightening; EUR loses ground against USD; Eurozone inflation data worsen.

The European Central Bank recently released its monetary policy meeting minutes, showing that the bank’s policymakers supported the decision to continue with an accommodative monetary policy stance until March 2022.

The committee also expressed concerns regarding the future of the Eurozone economy, as they expect the economy to return to pre-crisis levels by the middle of 2022.

European Central Bank President Christine Lagarde recently warned against stopping stimulus measures now that economic recovery is in sight.

“Any kind of tightening at the moment would be very unwarranted,” she commented, adding that doing so could lead to “very serious risks”.

The Eurozone continues to struggle with inflation and the effects that exchange rates are having on it. The recent appreciation of the euro is a matter of concern for policymakers, since it is making exports more expensive and hurting local producers.

“It was pointed out that the nominal effective exchange rate currently stood at an all-time high and that the recent appreciation could contribute significantly to the subdued inflation outlook,” stated the ECB Monetary Policy Committee in its minutes.

The Eurozone economy is expected to rebound by 5.3% this year, as many expect the economy to return to normalcy now that a vaccination campaign is underway.

The ECB Monetary Policy Committee is expected to meet next Thursday.

Economic Calendar

This week, the markets learned some relevant information about the state of the European economy. On Wednesday, Eurostat reported that industrial production stood at 2.5%, against October’s 2.3% and expectations of 0.2%. In yearly terms, it fell by 0.6%, higher than expectations of 3.3% and the previous month’s 3.5% drop.

Euro Loses Ground Against the Dollar

So far this week, the euro has dropped by 0.63%, breaking a two-week gaining streak.

Many link this sudden weakness of the euro with the recent strength of the US dollar, as the markets expect President-elect Joe Biden to announce a very ambitious fiscal stimulus package. Those expectations made traders rush from bonds to stocks and the dollar.

“With labor really struggling, there’s an argument that we could push for a higher stimulus number,” commented an analyst at OANDA. “In the end, markets are anticipating that we’re going to see more stimulus than what is expected in Biden’s first 100 days and that’s why we’re seeing the dollar holding up.”

As we already mentioned, European policymakers have been very concerned regarding the recent appreciation of the euro, as it poses a problem for exporters. Many speculate that this opens the doors for a Forex intervention, though it’s not clear if such a step is likely at this point.

Eurozone Inflation Data Worsen

Since our last report, inflation data have worsened. In yearly terms, the Consumer Price Index fell by 0.3%, higher than expectations of -0.2%. In monthly terms, the Consumer Price Index remained in line with expectations at -0.3%.

Inflation remains too low, taking into account that the European Central Bank aims for a 2% inflation level.

The unemployment rate has improved at 8.3% according to the last reading, and better than expectations of 8.5%.

Gross domestic product data have remained unchanged until now.

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