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USD/JPY Fundamental Daily Forecast – BOJ Wants Fiscal Policy to Play Bigger Role in Battling Economic Risks

Bank of Japan board members said the central bank must work carefully with the government in dealing with the next economic downturn, minutes of the BOJ’s October rate review showed on Tuesday.
James Hyerczyk
USD/JPY

The Dollar/Yen is trading flat on extremely low volume as most traders have taken to the sidelines ahead of the Christmas holiday on Wednesday. The Forex markets are open in Japan, but closed in Europe, New Zealand, Australian and the United States.

There is only one report from the U.S. on Tuesday. According to CNBC, the Federal Reserve Bank of Richmond will release its monthly Business Activity Survey at 15:00 GMT. The survey shows the state of manufacturing activities including shipments, new orders and employment in the sector.

The manufacturing sector softened in November, weighed down by negative readings for shipments and new orders, the survey showed last month. Manufacturing firms also reported a drop in backlog of orders, but they were optimistic that conditions would improve in the coming months, the Richmond said in its last survey.

At 08:07 GMT, the USD/JPY is trading 109.381, up 0.001 or 0.00%.

The recent price action has been driven by the U.S. stock and Bond markets. Both close at 18:00 GMT and 19:00, respectively.

BOJ Debated Monetary, Fiscal Policy Mix as Cost of Ultra-Low Rates Rises

Reuters reported early Tuesday that a few Bank of Japan board members said the central bank must work carefully with the government in dealing with the next economic downturn, minutes of the BOJ’s October rate review showed on Tuesday.

The nine-member board also debated the demerits of prolonged monetary easing, with one warning that life insurers could struggle to meet provisions guaranteed to policy holders if current ultra-low interest rates persist, the minutes showed.

The deliberations highlight the growing view within the BOJ that fiscal policy may need to play a bigger role in battling risks to the economy, given the rising cost and diminishing return of monetary easing.

“The BOJ should prepare for the next economic downturn as among risk scenarios. In doing so, it’s important not only to take monetary policy action but enhance cooperation with the government” such as through fiscal policy, the minutes quoted a few board members as saying at the October meeting.

At the October 30-31 rate review, the BOJ kept policy steady but gave the strongest signal to date that it may cut interest rates in the near future, underscoring its concern that overseas risks could derail a fragile economic recovery.

The nine-member board is split between those who see room to ramp up stimulus to fire up inflation, and those who are more concerned about the demerits of the BOJ’s ultra-easy policy.

“While financial institutions’ soundness was ensured for the moment, the cumulative side effects of prolonged low interest rates warranted vigilance,” a few board members were quoted as saying at the October rate review.

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