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USD/JPY Could Be Supported by BOJ Policy Stance

Currencies / Japanese Yen Sep 09, 2016 - 05:09 PM GMT

By: Submissions


easyMarkets writes: When the Bank of Japan released its last monetary policy statement, many analysts expected that they would follow suit with Japanese Prime Minister Shinzo Abe and the rest of the Japanese government by releasing a large stimulus plan. Prime Minister Abe’s plan gave a 28 trillion yen stimulus plan to bolster the economy. However, the Bank of Japan did not follow suit. Instead, they decided on increasing dollar-lending and exchange traded fund purchases. Despite negative interest rates, no changes were made to the base interest rate or to the current bond-purchase program.

Overall, the impact on the USD/JPY has been muted, and the pair has since moved lower to the 102 region. Many have argued that this BoJ plan of action has not been aggressive enough to make a significant change in the lagging Japanese economy. The loudest critics of the Bank of Japan’s current position has been the Japanese government and investors. However, the Bank has also made it clear that the latest monetary policy statement did not reveal their entire plan.  Surprises here could lead to potential trend changes in the USD/JPY.

Market Reactions

In the aftermath of the release of the monetary policy statement, the price of the yen has started to stabilize. The USD/JPY initially fell below the 103.00 handle, and this is significant because it gives the Bank of Japan a much better chance at achieving its target rate of 100.00.

Exchange traded fund purchases have increased to 6 trillion, which has almost doubled since last year’s 3.3 trillion.  However, bond purchases remain unchanged at 80 trillion yen, as well as key interest rates which remain at -0.1%. Because the Bank of Japan has given themselves room to change their policies and reveal new changes at future meetings, the current policy setting and economic environment will be reviewed thoroughly by investors in order to assess needs for the next meeting in September.

Japan’s Economy

Broadly speaking, the Japanese economy has been slowing down for a significant period of time, sparking worry and concern not only in Japan but around the world. Many have been looking for the Bank of Japan to release an increased stimulus plan in order to bolster the economy, getting it back on its feet. Stocks have been weaker in Japan and around the world in the wake of the Brexit decision in Britain. Interest rates have been negative since January, with no signs of changing on their own and inflation rates have continued to evade the country’s goal of 2%. Unemployment has been reaching dramatic lows, however there have been no wage increases.  All of this points to potentially higher valuations in currency pairs like the USD/JPY and the EUR/JPY.

Expectations for the Future

At this stage, many analysts believe that the Bank of Japan is going to ease into any new changes, and that their next few meetings will reveal more alterations in policy. Many also believe that the changes will be applied at the bank’s discretion depending on current economic data, and that easing could linger. There is a worry that the bank has reached their limits and they are not strong enough to implement any changes that will have large effects on the economy. With this in mind, it would be surprising if we started to see forex traders making significant positioning changes as there is little reason to believe that the overall trends in the USD/JPY will be changing before the end of this year.

By easyMarkets

© 2016 Copyright easyMarkets - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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