USD/JPY Fundamental Daily Forecast – Yen Weakens after BOJ Cuts Inflation Forecasts

The Dollar/Yen is trading higher on Thursday after the Bank of Japan kept its monetary policy unchanged after its two-day meeting, but it cut inflation forecasts for fiscal years 2017/2018 and 2018/2019. The move highlights the divergence between that of the BOJ and the U.S. Federal Reserve.

At 0700 GMT, the USD/JPY is trading 112.124, up 0.196 or +0.17%.

The BOJ’s new forecast calls for inflation to come in at 1.1 percent for the current fiscal year, down from its previous forecast of 1.4 percent. For the next financial year, it expects inflation to hit 1.8 percent instead of 1.9 percent.

“The timing of the year-on-year rate of change in the CPI reaching around 2 percent will likely be around fiscal 2019,” the central bank said in its latest statement. It had previously said it would hit the target before the end of March 2019.

The BOJ also sounded more upbeat about the country’s economy. It raised its gross domestic product expectations for the current and the next fiscal years to 1.8 percent and 1.4 percent, respectively. These estimates represented upgrades from the previously expected 1.6 percent and 1.3 percent.

Despite the reaction by traders, economists had expected the BOJ to lower inflation forecasts, keep rates unchanged and hold-off from expanding stimulus. That being said, we can safely say the monetary policy statement and outlook contained no surprises.

Others had a different opinion on the move, however. Credit Suisse’s chief economist for Japan Hiromichi Shirakawa said that he was surprised that the central bank pushed back the timeline to achieve its 2 percent inflation target.

Shirakawa said, “That surprised me because BOJ already started tapering, I think this decision means BOJ may need to slow the pace of tapering into next year. That’s inviting downward pressure on interest rates and downward pressure on exchange rate, so BOJ has decided to slightly increase stimulus even though they’re tapering.”

In other news, Japan’s Ministry of Finance data showed on Thursday that the country’s exports grew 9.7 percent year-on-year in June.

Forecast

The BOJ news is supportive for the USD/JPY but gains could be limited or the Forex pair could even turn lower if U.S. economic data continues to diminish the odds of a third Fed rate hike later this year.

Also helping to boost the Dollar/Yen is greater demand for higher risk assets.

Technical factors are also contributing to today’s early strength. On Wednesday, buyers came in at 111.547 when the USD/JPY tested a key retracement zone at 111.640 to 110.967.

If a new range develops between 114.492 and 111.547 then look for a possible shift in momentum with 113.020 to 113.367 the next likely upside target.