USD/JPY Fundamental Daily Forecast – BOJ Struggles with Low Inflation, While High Inflation Plagues Fed

Although the price action in the Dollar/Yen this week has been mostly driven by expectations of a November tapering by the Federal Reserve, an earlier than expected rate hike by the Fed and a surge in U.S. Treasury yields, leading to the widening of the spread between U.S. Government bonds and Japanese Government bonds, there was some activity from the Bank of Japan that should be noted.

On Thursday, the USD/JPY settled at 111.280, down 0.702 or -0.63%.

Kuroda Vows to Keep BOJ’s Focus on COVID-19 Response amid Week Inflation

The Bank of Japan (BOJ) will continue to focus on cushioning the economic blow from the coronavirus pandemic, given lingering uncertainty over the outlook and subdued inflation, Governor Haruhiko Kuroda said on Monday.

Corporate funding remains severe for retailers hit by the health crisis, Kuroda said, signaling the central bank’s readiness to extend the current March 2022 deadline for a range of pandemic-relief programs.

Sluggish domestic demand and companies’ reluctance to pass on higher raw material costs to consumers will likely keep any rebound in inflation moderate, Kuroda said.

“It’s true Japan’s economy has been held back by the successive waves of COVID-19,” Kuroda said in a speech at an online meeting with business leaders in Osaka, western Japan.

“It’s becoming quite difficult to achieve our 2% inflation target,’ Kuroda told reporters after the meeting, reinforcing expectations the BOJ will lag well behind other major central banks in withdrawing its massive monetary support.

Kuroda said Japan’s economic recovery would strengthen as manufacturers continue to benefit from robust overseas demand, Reuters reported.

BOJ’s Kuroda Projects Economic Recovery to Pre-COVID Levels by Early 2022

Japan’s economy will continue to recover and could reach levels seen before the coronavirus pandemic by the end of this year or early in 2022, Bank of Japan Governor Haruhiko Kuroda said on Thursday.

With consumption weak and inflation well below its 2% target, however, the BOJ will maintain its massive stimulus regardless of the new government policies, Kuroda said.

“Whatever fiscal, regulatory or any other policies the new government pursues, the BOJ will continue to maintain extremely accommodative monetary policy in order to achieve its 2% price stability target as soon as possible,” Kuroda said.

“This is our mandate and that mandate is unlikely to change,” he said in an online seminar hosted by the European Central Bank on Wednesday, or early on Thursday Tokyo time.

Daily Forecast

Kuroda wants to achieve 2% price stability, meanwhile Chairman Powell at the Fed wants to make sure inflation moves back down toward the central bank’s 2% mandate. The BOJ has to keep rates low in order to allow inflation to climb. The Fed will have to start tapering its massive stimulus and eventually raise rates in 2022 in order to prevent the U.S. economy from overheating.

With the BOJ holding rates steady and the Fed moving toward a rate hike, the interest rate differential favors the U.S. Dollar over the Japanese Yen.