Forex Trading Library

BoJ Monetary Policy Preview: Facing Tough Choices

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While the markets may be focused on today’s FOMC meeting, where the Federal Reserve is expected to hold the Fed funds rate unchanged at 0.50%, the Bank of Japan will be meeting only a few hours later. Market participants remain concerned about the outcome of tomorrow’s BoJ meeting but broadly agree that Japan’s central bank could ease monetary policy aggressively before July 2016.

At its last policy meeting in April, the Bank of Japan refrained from further easing or cutting interest rates, which currently stands at -0.10%. The markets had rallied ahead of the April meeting on rumors that the BoJ could act in April. In May, professional forecasters said that they expected the BoJ to move either in June or July with additional easing.

As the USDJPY continues to hover above the 105Yen region, the BoJ is faced with a tough choice in its attempt to control the exchange rate while at the same time focus on policies aimed at stoking inflation.

Latest inflation numbers from Japan, released in May, last month showed that the BoJ’s gauge of the core consumer prices index increased at a slower pace, rising 0.90% in April. This was lower than March’s increase of 1.10%. The Bank of Japan maintained that falling crude oil prices were only temporary and expects inflation to rise once oil prices stabilize. WTI Crude oil prices have been trending higher over the past couple of months, but the effects are yet to be seen on the inflation print.

Adding further to the complexity is the geopolitical risk arising out of the June 23rd UK referendum on its EU membership. The risk event has seen investors shun risk assets and embrace the safe haven bonds, gold, and the yen to a certain extent.

[Tweet “Japan’s PM Shinzo Abe postponed the proposed sales tax hike to October 2019”]

BoJ and Japan government officials have come out vocally in support of the yen every time the dollar fell closer to the 105yen level. While the Washington and Tokyo accuse each other of intervening in the currency markets and artificially keeping the exchange rate weaker, the yen’s rapid rise has hit Japan’s exporters this year. With the Brexit threat looming, many expect the BoJ to hold off policy easing this month, which raises expectations for July’s meeting as the most appropriate in terms of timing.

Last month, Japan’s PM Shinzo Abe postponed the proposed sales tax hike to October 2019 and expected to unveil new stimulus spending plans. Furthermore, Japan goes to polls to elect the members of the upper house of parliament in early July. Political observers expect that any policy changes ahead of the elections could be seen as being politically motivated, keeping the BoJ in a tight spot.

While the yen might weaken into the FOMC event, the current uncertainty in the markets alongside the factors that could keep the BoJ’s hands tied could limit the yen’s declines in the near term.

USDJPY – Technical Outlook

The weekly chart for USDJPY shows prices hovering just above the 104 – 105 level of support, which was previously a minor resistance level. An eventual decline to 104 – 105 could see the support level being tested. If the support holds the declines in USDJPY, expect a near-term rally towards 110.88 followed by an extended move to 115.0 – 116.50 where the resistance level could be challenged.

USDJPY - Weekly Chart (104/105 Support)
USDJPY – Weekly Chart (104/105 Support)po
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