USDJPY Anchored by BOJ Decision

The USDJPY is expected to remain bearish in the weeks ahead on the trail of the Bank of Japan’s decision and in anticipation of the fiscal easing package.

Analysts from Danske Bank state that, “The Bank of Japan (BoJ) is increasing its purchases of ETFs but has kept the policy interest rate and bond purchase programme unchanged at -0.1% and JPY80trn, respectively. The BoJ is keeping the door open for additional easing in September as it awaits the government’s fiscal easing package. We do not see today’s lack of action as a token that the BoJ is done but given that the BoJ refrained from cutting interest rates further into negative territory, we no longer expect it to cut interest rates further. We expect USD/JPY to remain heavy in coming weeks, targeting 100 in 1M. Longer term, the outlook for USD/JPY very much depends on the size of the fiscal package and the BoJ’s subsequent policy response at the next MPM on 21 September. We are currently reviewing our 3-12M USD/JPY forecast but in general we see less upside potential in the cross, as we no longer expect further negative interest rates.”

The dollar last week was weaker against a basket of major currencies with some significantly sharp losses witnessed against the New Zealand dollar and the Japanese yen. We also saw the USDJPY fall from 105.60 eventually settling below 102 after the Bank of Japan revealed a very moderate raise in monetary stimulus. As the yen strengthens and the economy deteriorates rapidly, traders are actively strong for a hard felt dose of easing that would persuade the market to believe that the BoJ will stop at nothing to reverse the current economic situation. Unfortunately, the central bank plans to use the smallest amount of support by doubling its dollar lending facility and increasing ETF purchases. This happened to be the least expected by the market, with the BoJ failing to cut interest rates, increase bond purchases or go for the far-fetched like helicopter money, investors responded to their decisions by sending the yen skywards.

“Overall, the announcement is a disappointment and the BoJ’s decision is negative for risk and global bond markets. However, the market reaction has been relatively modest given the significant disappointment: USD/JPY dropped 2.5 figures and initially dipped below 103. Markets are still speculating on a large fiscal stimulus package, which is likely to be announced next week.” Danske Analysts also added.

Fiscal makers are partly responsible for these problems as they have fallen short of what was truly a great hurdle, with the scope of widened stimulus from the BoJ also crumbling alongside. This goes to show that whatever actions are taken by the BoJ will have weak impact, if it is unmatched a fiscal policy on response which is seemingly not forthcoming.

With the bar for BoJ disappointment lowered by the outcome of their most recent meeting, the coming week will hold much more volatility for the pair and other JPY pairs.