USDJPY: kicked when it’s down by the BOJ

21 January, 2015

USDJPY has fallen below 118.00 after the Bank of Japan decided to maintain its current QE programme at its meeting earlier today. Although the base case was for no change from the BOJ, there was a small segment of the market who thought that the BOJ may boost the size of its QE programme ahead of the ECB’s expected announcement later this week, and in the wake of the explosive SNB action last Thursday. However, the BOJ didn’t appear distracted by the actions of its peers. Below are the main points from this meeting:

  • The BOJ upgraded its growth forecasts for 2015 and 2016, this was not expected.
  • The board members revised down their median inflation forecast for next year to 1% from 1.7% on the back of the falling oil price. However, the Bank still expects to meet its 2% target in 2016.
  • The statement was virtually unchanged, save for the downgrade to the inflation forecasts.
  • Governor Kuroda seemed sanguine on the back of falling prices, saying that the impact from oil prices will be temporary, and a cheaper price for oil is good news for the Japanese economy.
  • Inflation could gain importance in the coming weeks as pay negotiations for this year begin. According to reports in the Japanese press, BOJ members want to see a 1% pay rise for this year. After the unemployment rate fell to a 16-year low last year, this target seems achievable, which could reduce pressure on the BOJ to take further stimulative policy action.

What this means for BOJ policy in the next few months:

Overall, QE seems to be on the backburner at the BOJ, and it seems happy to maintain its annual JPY 80 trillion programme until it reaches its 2% inflation target, expected sometime next year.  This should be mildly JPY bullish, especially against the EUR, where the ECB is expected to embark on its first QE programme later this week.

However, there is a risk to this view, if the BOJ is too sanguine on inflation – either prices fall at a faster pace than expected, or wages don’t rise by at least 1% - then the BOJ may have no choice but to expand its stimulus package, particularly if the ECB announce a “big bazooka” tomorrow, of EUR 1 trillion or more.

The impact on the JPY:

The yen has been drifting higher since the start of this year, and we expect the yen to remain in demand while the global market outlook remains uncertain. Chinese growth fears, reverberations from the SNB action, potential turmoil from the ECB meeting on Thursday or an adverse outcome from the Greek elections next week, could all trigger safe haven inflows into the yen in the next few weeks.

Last week’s commitment of traders report from the CFTC, which measures whether speculators are long or short the yen, showed a small increase in yen shorts. This suggests that the market is still short the yen, so there is the potential for further upside, particularly if the market does not expect the BOJ to embark on further easing.

From a technical perspective, there seems to be a lethargy in USDJPY right now, and short-term buying interest seems to be exhausted, suggesting that we could be due a period of consolidation and moderate yen strength.

Key USDJPY levels:

Key resistance lies at 118.85, while hourly supports can be found at: 116.93 (19th Jan low), then 115.86 (16th Jan low).

Figure 1:


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