USD/JPY Fundamental Weekly Forecast – BOJ Decides to Fight Coronavirus Fallout with Risky Asset Buying

The Bank of Japan started the week by unveiling a series of emergency monetary policy measures to shore up the world’s third-largest economy as the coronavirus pandemic threatens a global recession.

In a policy meeting brought forward by two days, the BOJ said it would double its annual capacity to purchase exchange-traded funds and Japan real estate investment funds, the latest of many global central banks to take emergency action.

The bank said it had decided unanimously to “actively” purchase ETFs (exchange-traded funds) and J-REITs (investment funds tied to Japanese real estate) with an annual upper limit of 12 trillion yen ($112 billion) and 180 billion yen respectively.

The BOJ said it would also introduce a new operation to provide loans against corporate debt and raised its annual limit for corporate bond purchases by one trillion yen to 4.2 trillion yen. But it left its main interest rate unchanged at minus 0.1 percent and also kept its upper limit for purchasing government bonds to 80 trillion yen.

“There have been significant uncertainties over the consequences of the outbreak of COVID-19 and over the size and persistence of their impact on domestic and overseas economies,” said the bank in a statement.

BOJ Chief Haruhiko Kuroda said hours afterwards that the body expects the impact of the virus to “continue for some time”.

“There are so many uncertain factors. It is necessary that we continue to fully monitor the economic situations at home and abroad,” he added.

“Coronavirus or not, if there is downward pressure on the economy and prices, we will consider additional monetary easing measures to deal with it.” – Olympics fears – Prime Minister Shinzo Abe welcomed the measures as “swift and appropriate”. He is due to talk with other G7 leaders in an extraordinary summit held via teleconference later Monday.

Additionally, the Japanese economy was tottering even before the coronavirus struck, with the growing fears of a recession. “Japan’s economic activity is likely to remain weak for the time being, mainly affected by the outbreak of COVID-19,” the BOJ said.

Daily Forecast

Ultimately, the direction of the USD/JPY this week will be determined by the direction of U.S. Treasury yields.

Rising yields will widen the spread between U.S. Government bond yields and Japanese Government bond yields. This will make the U.S. Dollar a more attractive investment.

Another plunge in U.S. yields should underpin the Japanese Yen.