Friday's Bank of Japan (BoJ) policy meeting might give traders fresh reasons to sell the yen as the central bank reacts to recent weak data that has cast a pall over its existing forecasts. The BoJ, aware that Japan's export growth remains sluggish and that domestic consumers have reined in spending after April's sales tax hike, is likely to cut its economic growth forecast for this fiscal year, ending on March 31, 2015.
The central bank may also pare back its inflation forecasts, recognising the disinflationary effect of lower oil prices. But it will retain its view that inflation will reach its 2 percent target in 2015, sources told Reuters on Tuesday.
That target arguably remains the cornerstone of Japanese policymaking, a totem for the government's fiscal policy settings as much as for the BoJ's monetary stance - policises that have led to a weaker yen.
And the weaker yen, by generating imported inflation in the form of more expensive foreign currency-denominated imports, particularly of energy, has done part of the heavy lifting for the Bank of Japan in its pursuit of rising prices. Japan's policymakers surely want the yen to remain weak.
In light of recent economic data, many would argue the BoJ will have to expand its "quantitative and qualitative easing" (QQE) programme to try to stimulate economic activity further.
While no detail may be forthcoming yet, the central bank may debate whether to provide clearer guidance on its asset-purchasing plans for next year, the sources said.
The BoJ will also be conscious that the second half of the Japanese financial year began on Oct. 1. Companies have been making hedging plans in recent weeks for the next six months, factoring in their outlook for the yen's value.
Honda, Japan's third-biggest carmaker by revenue, said on Tuesday it assumed the average rate for the dollar versus the yen for the financial year 2014-15 would be 104.00, compared with a previous forecast of 101.
Others will be making similar forecasts, both importers and exporters. Those decisions will affect how Japanese corporate treasury departments approach hedging.
Put simply, if the BoJ can create an environment in which Japan's companies believe the yen will be weaker tomorrow than it is today, it will help influence corporate behaviour.
Japan's importers, who need foreign currency to pay for imported goods, will be motivated to act sooner rather than later, to get more bang for their yen.
Japan's exporters, who convert overseas earnings into their mother currency, will be minded to hold off hedging, in the belief that they will get more yen tomorrow than today.
In turn, if corporate behaviour evolves in this way, it helps to feed the narrative of a weaker yen that itself supports progress towards the BoJ's inflation target.
Friday could be the moment where the Bank of Japan sets the tone for a weaker yen for the next half-year.
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