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James Hyerczyk
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USD/JPY

The Dollar/Yen is trading higher early Tuesday, boosted by rising U.S. Treasury yields, which widened the spread between U.S. Government bonds and Japanese Government bonds, making the U.S. Dollar a more attractive asset.

The catalysts behind the move are position-squaring ahead of the start of the U.S. Federal Reserve’s two-day meeting and the dovish monetary policy announcements from the Bank of Japan earlier today.

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At 05:55 GMT, the USD/JPY is trading 108.216, up 0.122 or +0.11%.

The Dollar/Yen is up a second session following a 17 day decline early Tuesday. This may be suggesting the sell-off has run its course. The move was all about the tightening of the interest rate differential between U.S. Government bond yields and Japanese Government Bond yields.

If there is a retracement to the upside, then it is likely to be driven by the fact that the U.S. economy is improving faster than the Japanese economy and that this will continue as long as the U.S. vaccination rate continues to exceed that in Japan. If it weren’t for strong exports to the U.S. and China, the Japanese economy would probably be facing a prolonged recession.

BOJ Cuts Inflation Forecast, Issues Warning of Soft Consumption

The Bank of Japan on Tuesday cut this fiscal year’s consumer inflation forecast and warned of lingering risks to the economic outlook as the COVID-19 pandemic continues to hurt consumption, Reuters reported.

As widely expected, the BOJ maintained its short-term interest rate target at -0.1% and that for 10-year government bond yields around 0%.

The pick-up in consumption is stalling as downward pressure on service spending, such as for dining and accommodation, is strengthening,” the central bank said in a quarterly report on the economic and price outlook.

In its fresh quarterly projections, the BOJ said it expects core consumer inflation to hit 0.1% in the current fiscal year that began in April. That was lower than 0.5% projected in January.

The BOJ now expects core consumer inflation to hit 0.8% the following year and 1.0% in fiscal 2023.

The Bank of Japan also warned of “high uncertainty” on how much the pandemic could drag on growth, signaling its readiness to keep its money spigot wide open for the foreseeable future.

“Japan’s economy is likely to recover, though the level of activity will be lower than before the spread of the pandemic mainly for sectors that offer face-to-face services,” the BOJ said in the report.

“We will take additional monetary easing steps without hesitation as needed with a close eye on the impact of the pandemic,” it said.

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Short-Term Outlook

The key takeaway from the BOJ report is that policymakers have no choice but to continue their ultra-loose policy for several years.

For a look at all of today’s economic events, check out our economic calendar.

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