Japanese Yen Gains Could Be Limited As Tepid Prices Restrict BOJ

[DailyFx]

BOJ - Hinging on Prices
ECB - June Hike in the Cards, Virtually Guaranteed
PBOC - Under Pressure



Yield Spread Analysis 05/08 - 05/15
Long term rates in countries ranging from Australia to Switzerland rose over the course of the week, as solid economic data signaled that central banks would leave rates steady or consider tightening monetary policy over the next few months. Furthermore, we had actual policy action last week, as the Bank of England brought their benchmark 25 basis points higher (as expected) to 5.50 percent while data out of the UK underpinned the need for the hike. Meanwhile, the European Central Bank left their rates steady, but re-inserted the phrase "strong vigilance" into their rhetoric, signaling policy tightening in June.
In the US, the FOMC left their overnight rate at 5.25 percent last Wednesday, and the monetary policy committee?s statement reaffirmed their steady hand as they noted persistent price pressures offset by softening growth. Meanwhile, yields managed to hold relatively steady on the release of weaker-than-predicted CPI this morning. With a slew of speeches by Fed members scheduled this week, however, bond and FX markets could be sent reeling. Traders will tune specifically into members such as Fed Chairman Bernanke and uber-hawk Fisher.



BOJ - Hinging on Prices
Stubborn weakness in consumer prices appear to be the one caveat for another Bank of Japan hike, as Fukui?s comments signal that he is just itching to raise rates:

Toshihiko Fukui, Bank of Japan Governor
"Japanese real short-term interest rates are zero percent to 0.5 percent, which is far below Japan's economic growth rate of around 2 percent. A prolonged easy policy may stimulate economic and financial activity through the foreign exchange market and asset prices?Low interest rates are supportive but will hurt the economy if they are maintained too long." - May 10, 2007

Hidetoshi Kamezaki, Bank of Japan Board Member
"In the past, a tightening in the output gap had boosted prices. But that's not the case (now). That's because of globalization." - May 10, 2007

Seiji Nakamuram, Bank of Japan Board Member
"In reality, their costs (Japanese companies) are rising?So unless (consumer) prices rise moderately eventually, they will have a hard time." - May 10, 2007
Now that Fukui has started to discuss the need to normalize rates again, fiscal officials have expressed some worry:

Koji Omi, Japanese Finance Minister
"We have been saying that we want the Bank of Japan to support steady growth of the economy from the monetary policy front, but interest rates are up to the BOJ to decide." - May 11, 2007




ECB - June Hike in the Cards, Virtually Guaranteed
A booming German economy has helped keep Euro-zone expansion on track, with first quarter GDP slowing less than expected to 3.1 percent. Furthermore, with Trichet bringing back the phrase "strong vigilance", all bets are on a hike by the European Central Bank in June to 4.00 percent. However, markets will be anxiously wondering whether they will move beyond that level this year:

Jean-Claude Trichet, European Central Bank President
"I would say that in the current situation, Europe is benefiting greatly from the cyclical effect of the brisk expansion of the global economy, but the effects of the start of the structural reforms...cannot be ignored." - May 14, 2007
"Strong vigilance is of the essence in order to ensure that risks to price stability over the medium term do not materialize." - May 10, 2007

Michael Glos, German Economics Minister
"The German economy is on a robust growth path. I expect a normalization (in private consumption) in the course of the year, helped by a recovery in the labor market." - May 15, 2007




PBOC - Under Pressure
China was already under pressure to allow the yuan to appreciate, and with retail sales and GDP skyrocketing in the first quarter, the US will only push harder. However, the People?s Bank of China efforts to cool growth recently have been only with interest rate hikes:

Henry Paulson, US Treasury Secretary
"I'm expecting progress. We are dealing with very important longer-term reforms?There will be progress (in the talks), and the currency is an important part of this, and we press on currency all the time. I'm just saying that the most significant issues can't be solved overnight." - May 11, 2007

Alan Greenspan, Former Federal Reserve Chairman
"It's in China's self-interest to allow the renminbi (yuan) to move up faster." - May 11, 2007
Will they shift their strategy, give into US pressure, and enact a repeat of July 21, 2005?

Fan Gang, Advisor to the PBOC Monetary Policy Committee
"A one-off major appreciation may be needed if China does not allow the yuan to rise faster?but it is less risky and less shocking to make small adjustments and gradual appreciation from an early stage, than being still for a long time." - May 10, 2007