USD/JPY Fundamental Daily Forecast – BOJ Expected to Express Concerns Over Stubbornly Weak Inflation

The Dollar/Yen is recovering from Tuesday’s weakness, primarily due to the slight recovery in U.S. equity markets. Short-covering and position-squaring ahead of the Bank of Japan’s interest rate decision is also taking place. The BOJ is widely expected to hold interest rates at ultra-low levels. The BOJ is also expected to release its monetary policy statement and its outlook report. The focus for the central bank will likely be on concerns over slow growth.

At 0500 GMT, the USD/JPY is trading 109.699, up 0.334 or +0.30%.

Earlier in the session, Japan reported that its exports in December fell the most in more than two years. Exports in December fell 3.8 percent from a year earlier, Ministry of Finance (MOF) data showed on Wednesday, bigger than a 1.9 percent drop expected by economists. It was the sharpest year-on-year decline since October 2016. Traders blamed the on-going trade war between the U.S. and China for the weakness.

The report showed that exports to China, Japan’s biggest trading partner, fell 7 percent in the year to December. One of the biggest concerns is that the U.S.-China trade dispute is already working its way through the global supply chains with new worries that a severe disruption could drive down corporate profits in Japan and other countries. This could accelerate the widely predicted global economic slowdown.

A Reuters poll of economists showed the heightened external pressures have increased the chances of Japan sliding into a recession this coming fiscal year starting in April.

The report also showed Japan’s shipments to Asia, which account for more than half of overall exports, fell 6.9 percent in December. Furthermore, Japan’s overall imports in December rose 1.9 percent from a year earlier, bringing the trade balance to a deficit of 55.3 billion yen and marking an eighth month of shortfalls in 2018. That led to Japan’s first full-year trade deficit since 2015 when it was reeling from a spike in fuel imports to make up for the loss of nuclear power following the 2011 Fukushima disaster.

Forecast

With inflation stubbornly weak and issues developing with the slowing global economy, the Bank of Japan is widely expected to leave interest rates unchanged at this week’s meeting.

The BOJ is also set to debate downside risks to the economy and the inflation outlook. Weakening inflation and slowing external demand mean the BOJ is in no position to normalize monetary policy, while some investors are speculating further easing down the road.

After the release of the BOJ’s decisions, traders will go back to watching for any more clues regarding the slowing global economy. If the meeting between the U.S and China, scheduled for January 30-31, is officially canceled then this could trigger a flight to safety rally in the Japanese Yen.