USD/JPY Fundamental Daily Forecast – BOJ Holds Policy Steady as Dollar/Yen Probes Key 145 Level

The Dollar/Yen is edging higher on Thursday after Bank of Japan policymakers voted to keep ultra-low interest rates and vowed to hold them there. The move is a complete divergence from the U.S. Federal Reserve’s decision on Wednesday to raise interest rates and vow to keep increasing rates until inflation is brought down.

At 05:00 GMT, the USD/JPY is trading 144.848, up 0.763 or +0.53%. On Wednesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $64.97, down $0.09 or -0.14%.

The move by the BOJ was not a surprise, but the decision flew in the face of the global tide of monetary tightening by most major central banks that have chosen to battle soaring inflation over support from their struggling economies.

The policy divergence with the Fed drove the USD/JPY to a fresh 24-year high and past the closely monitored 145 level. It also magnified the dilemma Tokyo faces in trying to support its fragile export driven economy with ultra-low rates without accelerating a devastating Yen decline that inflates the costs of imports while threatening the stability of Japan’s economy.

No Surprise:  Bank of Japan Holds Policy Steady

As widely expected, the BOJ kept unchanged its -0.1% target for short-term interest rates, and 0% for the 10-year government bond yield by a unanimous vote.

The central bank also decided to phase out a pandemic-relief loan scheme and instead expand a liquidity operation targeting a broader range of corporate funding-needs, Reuters reported.

“The BOJ expects short- and long-term policy interest rates to remain at their present or lower levels,” the central bank said in a statement announcing the rate decision, making no change to its dovish guidance.

Fed Goes Supersized Again; Powell Vows to ‘Keep at It’

Contrary to its counterpart in Japan, the Federal Reserve announced its third straight 75 basis point rate hike after recent inflation data showed little to no improvement despite the Fed’s aggressive tightening. Meanwhile, the labor market remains robust with wages increasing as well.

The Fed’s target policy rate is now at its highest level since 2008 – and new projections show it rising to the 4.25%-4.50% range by the end of this year and ending 2023 at 4.50%-4.75%.

After the FOMC announced its rate hike, Federal Reserve Chair Jerome Powell vowed in his press conference that he and his fellow policymakers would “keep at” their battle to beat down inflation, and more “pain” is to come.

Short-Term Outlook

The USD/JPY rose above the 145 level that some traders felt could make the BOJ uncomfortable enough to intervene in order to drive up the value of the Yen. However, there was no intervention although traders seemed a little uncomfortable chasing the Forex pair higher at current price levels.

Most economists weren’t looking at the 145 level as something significant, but my analysis suggests 146.780 is the level that could prompt the BOJ to step in.

Any intervention is likely to drive the USD/JPY lower over the short-run, but as long as there is a divergence in Fed and BOJ policy and the Fed keep raising rates, the long-term outlook will remain bullish.