USD/JPY Fundamental Daily Forecast – Pressured by Shedding of Safe-Haven Dollar

The Dollar/Yen is under pressure late Wednesday as investors continue to shed the safe-haven dollar. Traders are also reacting to a drop in demand for higher risk assets and lower U.S. Treasury yields. Volatility has been heightened by the announcement of retaliatory tariffs against the United States by China. The markets are especially on edge because Beijing’s list of products included U.S. crude oil.

At 1800 GMT, the USD/JPY is trading 110.942, down 0.414 or -0.37%.

Fundamental News

The Japanese Yen is also being supported by reports that Bank of Japan board members had disagreed on how far interest rates should be allowed to move from the central bank’s target.

The Bank of Japan policymakers disagreed over the likelihood of inflation picking up and the appropriate direction for monetary stimulus at their July meeting, a summary of their opinions showed Wednesday.

At the meeting, the central bank’s Policy Board decided to increase the sustainability of its easing measures by allowing long-term yields to rise higher and making its asset purchases more flexible.

The summary of opinions shows several board members saying that inflation was weaker than expected but would gradually gain momentum toward the BOJ’s target.

The pace of increase in core consumer prices excluding fresh food “is likely to continue accelerating moderately,” one person said.

“It likely will take more time than expected to achieve 2 percent inflation…However, as the output gap remains positive, many of the factors that have been constraining inflation are likely to be resolved gradually,” said another.

But a third board member argued that “inflation expectations have continued to show relatively weak developments. Under the current policy, the possibility of the inflation rate increasing gradually toward 2 percent is low.”

Policymakers also stressed the need to continue aggressive monetary easing to lift inflation, but said they should be alert to the negative impact of the economy.

“It is essential to pay close attention to the side effects…and continue to examine whether there is room to review the policy framework, with a view to minimizing such side effects as much as possible,” one person said.

The central bank’s massive bond purchases had been criticized for soaking up market liquidity, leading to a fall in trading volume. At the meeting held July 30-31, the BOJ policymakers voted 7-2 to maintain the target level for the yield on the benchmark 10-year government bond at around zero percent, while allowing the yield to “move upward and downward to some extent.”

“Controlling the long-term yields in a flexible manner is likely to contribute to maintaining and improving market functioning,” a board member was quoted as saying.

There were two dissenters, Goshi Kataoka and Yutaka Harada. They are described as the Policy Board’s biggest doves. One member argued against the tweak, warning that it could “contribute to sluggish prices” by allowing long-term interest rates to rise.