Japanese Yen Strengthens as BOJ Signals More Stimulus

The Bank of Japan (BOJ) officials concluded the two-day monetary policy meeting earlier today. The officials then released the interest rates decision, which was not surprising. The interest rates were left unchanged at the current level of minus 0.10%. The bank also said that more stimulus could be on the way. It also pledged to continue buying the Japanese government bonds (JGB) so that the ten-year yields will remain around or near zero percent. These purchases will increase at an annual pace of about Y80 trillion per year.

In making these large-scale asset purchases, the bank will buy exchange traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that the outstanding amount will increase at an annual pace of Y6 trillion and Y90 billion respectively. It will increase or decrease the purchases depending on the underlying market conditions.

In the statement, the bank said that the economy was on a ‘moderate expanding trend’ with wages growing slightly. This growth has been affected by the ongoing trade war, which was caused by Donald Trump and his tariffs on American allies and foes. This has affected the country’s exports, which slowed by -7.8% in May. Imports also slowed by -1.5% leading to a widening trade deficit. On inflation, the country’s consumer prices have remained in the range of 0.5% and 1.0%. This is much lower than the bank’s 2.0%.

On inflation, the Japanese economy has defied the so-called Philips Curve, which is a concept that states that inflation tends to rise with falling unemployment rates. In fact, with the unemployment rate at 2.4%, Japan has one of the best labor markets in the world. However, this has not led to improved wages. In addition, the economy is made up of mostly elderly people who are not known for their increased consumer spending.

On the outlook, the bank expects the economy to continue on a moderate expansion trend. This might be fueled by an expanding domestic demand. The bank also expects the external demand to continue increasing albeit at a slowing pace. The risks to the country’s economy are the US macroeconomic policies and their impacts to the global economy, and the increasing protectionist policies that are going on around the world. Other risks might be the global adjustments in IT related goods, the Brexit uncertainties, and the potential weakness of international economies.

The USD/JPY pair continued to decline as shown on the annual chart below. As of this writing, the pair was trading at the 107.63 level, which is the lowest level since January this year. This price is below the 50-day and 25-day moving averages while the RSI has moved to the oversold level. There is a likelihood that the pair will continue to decline to test the important low of 106.

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