USD/JPY Forecast: Bank of Japan’s Policy Stance in Focus

Highlights

• Volatile trade due to Japan’s finance ministry and central bank meeting.
• Bank of Japan maintains ultra-loose monetary policy stance.
• Market focuses on BOJ’s yield curve control policy and inflation forecasts.

Overview

The Dollar/Yen is trading nearly flat on Tuesday in a session that featured a volatile two-sided trade. The Forex pair whip-sawed on Tuesday on news of a meeting of Japan’s finance ministry and central bank.

The U.S. currency had hit a six-month high of 140.93 yen before the announcement. The dollar was last down 0.06% against the Japanese yen at 140.315 after the country’s finance ministry said senior officials from the Ministry of Finance, Bank of Japan and Financial Services Agency would meet from 8:30 GMT.

BOJ Holds Ultra-Loose Policy, Cautious on Inflation

Bank of Japan Governor Kazuo Ueda said on Tuesday the central bank will patiently maintain its ultra-loose monetary as there is some distance to sustainably achieve its 2% inflation target, downplaying expectations for a policy change in the near-term.

“We expect inflation to quite clearly slow below 2%” toward the middle of the current fiscal year, Ueda told parliament. “Inflation is likely to rebound thereafter … though there is high uncertainty” on the outlook, he added.

Positive signs included a likely big increase in pay in this year’s annual wage negotiations, which could help shake off Japan’s deflationary mindset.

“(We) will patiently continue monetary easing as there’s still distance to achievement of sustainable and stable 2% price hikes together with continued rises in wages,” Ueda said, adding that the BOJ would also continue its long-term government bond buying operations for now.

Market Watching BOJ’s July Meeting: Yield Curve Control Policy in Focus

Japanese central bank policy has been a major focus for investors in the past year after the BOJ last year intervened to strengthen the yen. This year the focus has been on whether and when it will change its ultra-loose monetary policy stance. Analysts believe the BOJ’s July meeting is one to watch for the outlook for developments concerning the Bank of Japan’s yield curve control policy.

Tokyo Core Inflation Slows; BOJ to Review Forecasts

Core consumer inflation in Tokyo, seen as a leading gauge of nationwide trends, slowed in May, but a key index stripping away the effect of fuel hit a four-decade high, a sign of broadening price hikes. The BOJ will review its quarterly growth and inflation forecasts at the July 27-28 policy meeting. Under projections made in April, the BOJ expects core consumer inflation to hit 1.8% in the fiscal year ending in March 2024, below a 2.3% forecast in a poll issued on May 15 by Japan Center for Economic Research.

Technical Analysis

The USD/JPY is currently straddling 140.498 (R2). This level is important because it could turn out to be the trigger point for an upside breakout.

A sustained move over 140.498 (R2) will signal the presence of buyers. If this is able to generate enough upside momentum then we could see a near-term acceleration into 144.432 (R3).

A sustained move under 140.498 (R2), however, will signal that the selling pressure is getting stronger. This could lead to a near-term test of 138.452 (R1)

Resistance & Support Levels