USD/JPY Fundamental Daily Forecast – BOJ Holds Firm Despite ‘Extremely High Uncertainty’ Regarding Economy

The Dollar/Yen is trading sharply higher early Friday after the Bank of Japan (BOJ) maintained its ultra-easy monetary policy stance, continuing its policy divergence with its global peers. The BOJ also made a rare reference to the currency market, saying it needed to watch its impact on the economy and markets.

On Thursday, the Forex pair plunged as aggressive Japanese Yen option traders bet heavily on the BOJ shifting to the hawkish side like its global counter-parts. Overnight, the bulls regained control, putting the market in a position to challenge the 24-year high at 135.599, hit earlier this week.

At 03:28 GMT, the USD/JPY is trading 133.799, up 1.554 or +1.18%. On Thursday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $70.90, up $0.88 or +1.25%.

The central bank kept its policy settings for yield curve control and asset purchases. This was in line with the forecasts of almost all surveyed economists.

BOJ Makes Rare Reference to Yen

“The only concession made by the BOJ was a rare reference to the Yen in its statement,” said David Forrester, a senior foreign-exchange strategist at Credit Agricole CIB in Hong Kong. “It will be important to see what Kuroda meant by ‘pay due attention to currencies’ in his press conference later today. I suspect the focus will be its impact on inflation.”

Daily Forecast

“Uncertainty regarding Japan’s economy is extremely high,” the BOJ said in a statement announcing the policy decision.

The dovish BOJ decision was widely expected. However, the BOJ’s stance is now even more at odds with the other major central banks. Since they are aggressively tightening policy to curb surging inflation. This is likely to contribute to the already established uncertainty.

The growing monetary policy divergence between Japan and the rest of the world has pushed the Yen to 24-year lows. This poses a threat to consumption by boosting already rising import costs.

Furthermore, the BOJ remains caught in a dilemma. With Japan’s inflation well below that of Western economies, its focus is to support the still-weak economy with low rates. But the dovish policy has triggered sharp Yen declines, hurting an economy heavily reliant on fuel and raw material imports.

After the policy announcements, the divergence between the hawkish U.S. Federal Reserve and the dovish Bank of Japan still remains so the USD/JPY is likely to resume its rally.