Date: 31 Jul 2019
The Bank of Japan kept interest rates on hold on Tuesday and maintained its commitment to ultra loose monetary policy as global uncertainties continue to shape global central banks outlook. The Bank of Japan also lowered its inflation outlook going into next year, as price pressures remain muted due to the ongoing Sino-U.S trade war and tepid wage growth inside the Japanese economy.
Bank of Japan Governor Kuroda offered more dovish commentary to market participants, as he noted that the central bank would ‘not hesitate’ to take further measures if required. In simple terms, the Bank of Japan are sending a clear message that further quantitative easing could be coming if the Japanese economy takes a downturn.
Inflation has repeatedly missed the Bank of Japan’s two per cent target, with the most recent projections from the central bank on Tuesday forecasting that inflation will remain at just one percent for the year through to March 2020. Many economists have argued how effective the Bank of Japan’s wide-scale bond purchasing programme, known as QE, has actually been.
The Japanese central bank also face another lingering problem, other global central banks are embarking on interest rate cuts, with the Federal Reserve widely tipped to begin a cycle of rate cuts later today. The main concern for the Bank of Japan will be the strength of the Japanese yen against the U.S Dollar and the euro, as the nation is somewhat reliant upon overseas companies buying Japanese electrical goods.
Should we see the Japanese yen strengthening a further five to ten percent against the U.S Dollar and the euro, it will become a policy dilemma for the Bank of Japan, who have previously actively intervened in the foreign exchange markets. Much much like the SNB, the Bank of Japan may be unable to directly intervene as it is difficult politically, especially with President Trump in office.
USD/JPY Daily Candlestick Chart | Source: ActivTrader
The Japanese yen is currently being heavily influenced by news coming from Sino-U.S trade talks in Shanghai, leaving the USD/JPY pair in a precarious positions ahead of the FOMC rate decision. Key upside resistance is found at the 109.30 and 110.00 levels, while major support is found at the 108.37, 107.50 and 107.20 levels.
Written by Nathan Batchelor, External Analyst, ActivTrades
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