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- The Bank of Japan has kept interest rates in negative territory since February 2016.
- Japanese inflation has stayed above the central bank’s 2% goal for over a year and a half.
- USD/JPY corrective advance could extend beyond 145.00 with a dovish central bank.
The Bank of Japan (BoJ) will announce its monetary policy decision early Tuesday, with market participants expecting no surprises from it. The central bank has kept its benchmark rate unchanged at -0.1% since early 2016 and will likely keep it that way once again. Additionally, the central bank established a Yield Curve Control (YCC) policy, limiting the yield flotation on its 10-year government bond. Regarding the latter, the latest decision was to allow a 50 basis point (bps) band on either side of its 0% target.
Policymakers are still waiting for more evidence that price pressures have reached healthier levels even though annual inflation has been above 2% for over a year and a half. At the same time, fears about the consequences of leaving the ultra-loose monetary policy held them back. Officials are paving the way for a rate hike when most major central banks would engage in rate cuts.
Governor Kazuo Ueda recently noted that the accommodative monetary policy and the effects of economic stimulus measures are supporting the Japanese economy while adding policymakers will patiently continue monetary easing under YCC to support economic activity and the cycle of wage growth.
Additionally, BoJ Deputy Governor Ryozo Himino recently discussed the benefits of a rate hike. Such comments fueled speculation the central bank was preparing to act, but Governor Ueda quickly clarified that’s not the case. At the time being, there are 15% odds a rate hike will be delivered in April.
If something, the focus will revolve around a potential adjustment of the Yield Curve Control program and any relevant change in the wording of the statement.
BoJ officials always express concerns about USD/JPY wild rides one way or the other, although the recent JPY appreciation brought some relief, as a weaker Japanese Yen means soaring import prices and a wider trade deficit. The recent downward correction makes it easy for BoJ’s officials to avoid damaging the economy should they finally decide to drop the ultra-loose monetary policy.
USD/JPY possible scenarios
The USD/JPY pair trades around the 143.00 level ahead of the announcement, with the Japanese Yen appreciating sharply even since bottoming against the US Dollar at 151.90 mid-November, just below the USD/JPY October 2020 record peak at 151.94.
From a technical point of view, the daily chart for the USD/JPY pair shows that the risk skews to the downside, with the ongoing advance seemingly corrective. The pair is recovering above a mildly bullish 200 Simple Moving Average (SMA) but still far below a bearish 20 SMA, which extends its slide below the 100 SMA. Finally, technical indicators are correcting oversold readings, aiming higher within negative levels.
An on-hold BoJ with a dovish communique, without hints of potential tightening, will likely push the pair north. An intermediate resistance level comes at 143.60 en route to the 144.40 region. Opposed, clearer clues on monetary policy adjustments could back the Japanese Yen. USD/JPY’s immediate support level comes at 142.45, followed by the 141.80 price zone.
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