By Reem Aboul Hosn,  Research and Market Analyst Officer, CFI Ltd
By Reem Aboul Hosn, Research and Market Analyst Officer, CFI Ltd

Will Japan’s spur helps BOJ maintain low-rate policy?

More than two decades ago, Japan led the way to the zero rate policy. Shortly after, many countries started implementing near or below zero interest rates

First Published: e-Forex Magazine 92 / Currency Clips / December 2019

More than two decades ago, Japan led the way to the zero rate policy. Shortly after, many countries started implementing near or below zero interest rates. 

Japan’s zero rate policy drove trillions of dollars out of Japan. For 28 years straight Japan has been the world’s biggest investor. Unfortunately, low rates are not always an effective tool to boost inflation. Countries can get caught up in deflation with no alternative methods of stimulating prices, growth, and demand. Looking forward, as other countries drop their interest rates to zero, investments funded with low yield currencies could make a comeback. If that’s the case, the dangers of 2008 could return.

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Prime Minister Shinzo Abe has unveiled a USD 120 billion stimulus package

Entering 2020, the country forecasts challenges weighing on its economy, the slump in exports due to slowing global growth and domestic market weakness post October 2019 sales tax hike, in addition to the effects of the trade tension between United States, China and Hong Kong. 

For this, the Prime Minister Shinzo Abe unveiled USD 120 billion stimulus package, to help the world’s third largest economy alleviate the impact of a tax hike and economic slowdown after spending for next summer’s Tokyo Olympics. Besides, the spur is also expected to repair damages after natural disaster, upgrade infrastructure and invest in new technologies.

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So far, this has gone far more smoothly than the previous experiences of tax hike. The third quarter GDP was only 0.1% down from previous quarter despite less consumer spending in September. This month, the rescue package came also as a response to the economic growth reduction (GDP) predicted by International Monetary Funds for the third time this year from 0.9% to 0.8%.

For now, the stimulus gave Bank of Japan more breathing room to keep its easing monetary policy on hold. Technically, the dollar yen chart is hovering near 108, if the pair crosses resistance level 108.90 it is expected to reach 109.37, then 109.80 alternatively the price movement below 108.50 is expected to hit support levels at 108 then 107.42.