USD/JPY Fundamental Daily Forecast – BOJ Warns Worsening Economy a Threat to Japan’s Financial System

The Dollar/Yen is trading lower and in a tight range for a fourth straight session on Wednesday with the Forex pair being held steady by safe-haven demand for the dollar and the Japanese Yen. It’s an unusual move, but there is no other explanation for the sideways price action. The fundamentals and the price action suggests offsetting demand.

At 09:08 GMT, the USD/JPY is trading 107.592, down 0.169 or -0.16%.

The price action could also be a reflection of some investors reacting to a flattening of the coronavirus curve, and others betting on a better economy in the future. Essentially, the direction of the USD/JPY will be determined by investor demand for risk, which seems to be a little weak after two-weeks of strength.

Technically, the main range is 112.226 to 101.185. Its 50% level at 106.706 is providing support, and its 61.8% level at 108.008 is acting like resistance, having stopped the market five sessions in a row.

Bank of Japan Warns of Potential Financial System Risks Triggered by Pandemic

There were no major economic reports early Wednesday, but the BOJ said in a semi-annual report on the financial system, Japanese financial institutions have increased lending to middle-risk borrowers, or companies with higher credit risk, in search of higher yields amid years of ultra-low interest rates.

The coronavirus pandemic, if prolonged, could trigger a negative feedback loop in which a worsening economy threatens to destabilize Japan’s financial system, the Bank of Japan warned Tuesday.

The BOJ has also increased high-risk overseas lending, such as those to energy firms hit by plunging oil prices, making their balance sheets vulnerable to global market volatility, it said.

Such exposure to various risks is among factors the BOJ must take into account in scrutinizing Japan’s banking sector, particularly because some of the loans could turn sour as the pandemic hurts the economy, the report said.

“Japan’s financial system is under strong stress but remains sound as a whole, with financial institutions providing necessary funds to support economic activity,” the BOJ said.

“If the economy suffers a prolonged and deep slump, however, that could trigger a full-fledged, banking-sector correction,” it said.

That may lead to a situation where a worsening economy hits borrowers and increases bad loans for banks, sapping their ability to boost lending – thereby aggravating the economic downturn, the JOJ said.

Short-Term Forecast

We expecting more sideways price action unless there is a major jump in stock market volatility. So far, the major U.S. stock indexes have maintained correction-like trading after a two-week rally so USD/JPY traders haven’t become agitated. However, a steep plunge on heavy volume could send investors into the U.S. Dollar for protection.