Fundamental analysis

USD/JPY: ahead of the Bank of Japan meeting

The Bank of Canada unexpectedly raised interest rates by 50 basis points to 3.75%, although markets had expected a 75 bps hike. The decision, which appears to have been fueled by growing fears over the threat of a slowdown in the Canadian economy and a deepening global recession, disappointed market participants and sent the Canadian dollar sharply weaker. Moreover, Bank of Canada Governor Tiff Macklem said that the central bank is nearing the end of the tightening phase, although further interest rate hikes are still possible.

“There will be a significant slowdown in the economy, and the next time the bank raises rates, it could be another higher-than-usual increase, or it could be the usual one,” Macklem said.

Investors will focus on the European Central Bank meeting on Thursday. ECB leaders are widely expected to raise the deposit and refinancing rate yet again by 75 basis points (deposits up to 1.50% and the refinance rate up to 2.00%).

And in Friday’s Asian trading session, the Bank of Japan will announce its decision on the interest rate.

In the current situation, when most of the world’s largest central banks are pursuing an aggressively tight monetary policy, sharply raising their interest rates, the BOJ is pursuing an extra-loose monetary policy, keeping the main interest rate in negative territory. This, on the one hand, supports the Japanese economy, which uses cheap loans, and Japanese exporters, and on the other hand, it harms the purchasing power of the population, which prefers imported goods, and increases the cost of imports, primarily raw materials, for Japanese enterprises themselves.

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But, most likely, the rate will remain at the same level of -0.1%. Moreover, “tomorrow a decision will be made on the economic stimulus package,” Japanese Finance Minister Shunichi Suzuki said. Japanese media reports that “more than 29 trillion Japanese yen is being considered for stimulus measures.”

All this (additional stimulus measures and further divergence of the curves reflecting the direction and dynamics of the monetary policies of the BOJ and other major economically developed countries) creates prerequisites for further depreciation of the yen. How to be, so that the fall of the yen does not become even more rapid? The authorities of Japan have, perhaps, one means left – foreign exchange interventions by the BOJ with purchases of the yen and government bonds.

The main thing here is “it is important to keep a sufficient amount of foreign reserves to support your own currency in the event of sharp and excessive market volatility,” Japan’s Chief Cabinet Secretary Hirokazu Matsuno said on Wednesday.

The BOJ itself has carried out foreign exchange interventions, which it does not report either before or after, at least twice over the past few weeks. Last Friday, the USD/JPY hit its all-time high (since 1990) near 151.94. However, it then dropped sharply, reaching an intraday low at 146.18 in a couple of hours. That is, the fall was almost 4%. At the beginning of this week, the price again made a breakthrough to the downside, dropping to the level of 145.46. During today’s Asian trading session, USD/JPY dropped to a 3-week low of 145.11.

It is obvious that it could not have done so without interference from “outsiders”. Such sharp fluctuations in the exchange rate are possible only in extraordinary cases of an economic or political nature, or, as it seems to have happened, as a result of the intervention of the BOJ.

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Nevertheless, the USD/JPY pair maintains a positive trend. A strong bullish momentum based on fundamentals is pushing it to new all-time highs.

At 06:00 (GMT) on Friday, the BOJ press conference will begin. In its course, BOJ Governor Haruhiko Kuroda will comment on the central bank’s monetary policy and the decision. As Kuroda has repeatedly stated earlier, “it is appropriate for Japan to patiently continue the current loose monetary policy.” He will probably say the same thing this time.

The material has been provided by InstaForex Company – www.instaforex.com


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