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USD/JPY Fundamental Daily Forecast – BOJ Holds Rates Steady; Bumps Up Growth Forecast as Global Risks Recede

In a quarterly review of its forecasts, the BOJ revised up its growth projection for the fiscal year beginning in April to 0.9% from an estimate of 0.7% growth made in October, helped by a boost from the government’s fiscal stimulus package.
James Hyerczyk

The Dollar/Yen is trading lower on Tuesday, but that price action is being fueled by safe-haven buying tied to a drop in demand for higher-risk assets and lower Treasury yields that are leading to a tightening of the spread between U.S Government bonds and Japanese Government bonds. The catalyst behind the weakness in the Forex pair is the fear of contagion of the newly identified Coronavirus in Asia.

At 09:41 GMT, the USD/JPY is trading 109.947, down 0.232 or -0.21%.

There was other news on Tuesday, which had a limited influence of the USD/JPY price action. The Bank of Japan kept monetary policy steady and nudged up its economic growth forecasts, as the government’s stimulus package and receding pessimism over the global outlook took some pressure off the central bank to top up stimulus, according to Reuters.

The BOJ also signaled cautious optimism over the global economy after the United States and China agreed on a preliminary deal to defuse their bitter trade war, saying that risks surrounding the outlook have “subsided somewhat.”

As widely expected, the BOJ kept its short-term interest rate target at -0.1% and a pledge to guide 10-year government bond yields around 0%.

The BOJ also maintained a guidance that commits to keeping rates at current low levels, or even to cut them, until risks keeping it from achieving its 2% inflation goal subside.

The BOJ target rates in guiding policy under a framework dubbed yield curve control. It also continues to buy huge amounts of government bonds and risky assets in an effort to fire up inflation to its elusive target.

Growth Projections Revised Higher

In a quarterly review of its forecasts, the BOJ revised up its growth projection for the fiscal year beginning in April to 0.9% from an estimate of 0.7% growth made in October, helped by a boost from the government’s fiscal stimulus package.

The BOJ also upgraded its growth estimate for fiscal 2021, but largely maintained its price forecasts that show inflation missing its 2% target through early 2022.

“Japan’s economy is likely to continue expanding moderately as a trend” as the impact of slowing global growth on domestic demand will be limited, the BOJ said in the quarterly report.

“While risks surrounding overseas economies have subsided somewhat, they remain big,” it said, underscoring the BOJ’s resolve to maintain its ultra-loose policy.

Fiscal Stimulus

BOJ officials hope the government’s $122 billion fiscal package and robust capital expenditure will off the hit the economy hit during July-September. Furthermore, policymakers hope the stimulus will offset the weakness from the economy driven by soft global demand, lower exports and supply disruptions from last year’s typhoons that continue to weigh on factory output.

Even with the stimulus, analysts believe Japan’s economy likely contracted in the final quarter of last year.

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