USD/JPY – Yen Plunges as BoJ Anounces Stimulus Surprise

USD/JPY has climbed sharply on Friday, as the pair trades in the mid-111 range in the European session. The pair jumped after a surprise announcement by the BoJ to increase stimulus by raising its monetary base target to JPY 80 trillion annually. In the US, today’s highlight is Revised UoM Consumer Sentiment. The markets are expecting the indicator’s upward trend to continue, with the estimate standing at 86.4 points.

The dollar has gained about 250 points against the yen on Friday, as the Japanese currency finds itself close to 7-year lows. The yen took a tumble after the BoJ surprised the markets with a move to increase monetary stimulus. The monetary base target has been increased from JPY 60-70 trillion per year to JPY 80 trillion. The BoJ said that the move was needed to increase inflation, which remains short of the central bank’s target of 2%.

Japanese data continues to impress this week. Preliminary Industrial Production sparkled in September, with a gain of 2.7%, compared to a reading of -1.5% a month earlier. The estimate stood at 2.3%. Earlier in the week, Japanese Retail Sales was unexpectedly strong in September, climbing 2.3%, its strongest gain since March and well above the estimate of 0.9%. There has been concern about consumer spending in Japan after the sales tax was raised in April from 5% to 8%. The government plans to increase the tax to 10%, but is wary about hurting the economy, which has been marked by modest growth. Meanwhile, Household Spending, an important consumer spending indicator, fell 5.6%, well below expectations.

It was another solid performance from US GDP, which posted a strong gain of 3.5% in Q3, ahead of the estimate of 3.1%. Although this was short of the Q2 reading of 4.0%, the two readings mark the strongest six-month gain we’ve seen in ten years. Unemployment Claims increased slightly to 287 thousand, slightly higher than the previous reading of 284 thousand. However, the four-week average remains at multi-year lows, pointing to an improving labor market.

The US dollar posted strong gains on Wednesday, boosted by a hawkish Federal Reserve policy statement. The Fed said that the labor market is strengthening and inflation remains on target, although it did note that the labor market participation rate remains low. As expected, the Fed completed the taper of its QE3 program. The asset-purchase program was initially started in 2008, at the height of the economic crisis, in order to boost a weak US economy. The termination of the QE is a symbolic step which is a vote of confidence from the powerful Fed that the US economy is on the right track.

USD/JPY 111.61 H: 111.89 L: 109.20