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Forex Flash: BoJ expected to update outlook report and upgrade inflation forecast - Nomura

FXstreet.com (Barcelona) - Nomura Strategist Yujiro Goto notes that the BoJ is expected to update its outlook report and is expected to upgrade its inflation forecast.

He adds that the Bank is also likely to change its forecast framework to emphasize 2% inflation is achievable in two years. He sees that the BOJ currently only releases the FY average forecast for FY13 and FY14, but it may extend the forecast horizon to FY15, or it may release end-FY forecasts. In terms of reaction, he can see two contrasting possibilities to this idea.

First, he feels that inflation expectations could rise as the BOJ shows its confidence in achieving the 2% target by FY2015. He notes that the inflation forecast among private forecasters is much lower than the BOJ's current forecast, but the BOJ tries to increase its inflation forecasts by showing a higher inflation forecast. As a result, he sees that domestic investors may consider more investment in foreign assets or domestic risky assets to be protected from higher inflation.

Second, he sees that the market may judge that the BOJ easing will end or shrink in FY14 as the inflation target is projected be achieved in FY15, which would be negative for risky assets as expectations that the low interest rate environment will continue for a long period would decrease. Long-term JGB yields could rise as well as the higher inflation forecast may weaken the policy duration effect. Thus, there is a risk that the higher inflation forecast of the Bank is regarded as the wrong message from the Bank. He writes, “If the BOJ includes 2% inflation in its updated forecasts, Governor Kuroda must make it clear to investors that the 2% inflation forecast does not automatically mean the accommodative stance will end soon.”

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