Reem Aboul Hosn Research and Market Analyst at CFI Financial Group.
Reem Aboul Hosn Research and Market Analyst at CFI Financial Group.

BOJ downgrades economic growth and inflation forecasts

Japan’s central bank ruled out a near-term interest rate hike in the middle of risks from global trade disputes, and raised warnings about vulnerabilities in the financial system from years of loose monetary policy.

First Published: e-Forex Magazine 83 / Currency Clips / November 2018

Japan’s central bank ruled out a near-term interest rate hike in the middle of risks from global trade disputes, and raised warnings about vulnerabilities in the financial system from years of loose monetary policy. In its quarterly economic outlook, the BOJ kept its policy unchanged and cut its inflation forecasts reinforcing the banks decision to sustain its Quantitative Easing program. The BOJ kept its short-term rate target at (-)0.1% and the long-term yield target around 0%. The bank cut its core consumer inflation forecast for the fiscal year ending in March 2019 to 0.9% from 1.1% three months ago and projected core consumer inflation to hit 1.4% in the year ending in March 2020. The interest rate remains short of its 2% target, forcing the central bank to maintain stimulus despite the impact on bank profits from years of near-zero interest rates. This year the JPY’s function as a safe haven currency weakened by higher returns from the USD. However, the foreseen risk of US/China trade conflict, slowing global growth and US growth and plateauing of Fed rates, suggest that the JPY could gain ground vs. the Dollar next year. Consequently, it is safe to say that the BOJ is unlikely to move interest rates or QE program any time soon. Hence, the USD/JPY is seeing little action after the status. In addition to the weakness from the Yen’s side, the Dollar/Yen pair was able to push higher following the strengthening of the US Dollar. The US Dollar formed a new 16-month high as US consumer confidence figure printed better than expected and rose to an 18-year high.

For a while now, the Dollar/ Yen pair has been trending in parallel with US equities meaning that US equities is a strong driver to the pair’s performance. With the incoming results of the midterm US elections 2018, the US Dollar weakened boosting the Japanese Yen. The Dollar/Yen is trading near 113.45 now becoming an immediate resistance, which if cleared should assist the pair to surpass the 113.80 supply zone and reclaim the 114.00 handle. The pair is still forming an upward channel. On the flip side, a sustained weakness below the 113.00 handle, the pair is likely to accelerate the slide towards 112.70-65.