Now that the Japanese lower house elections are over, trader focus is being placed on the Bank of Japan’s monetary policy decision – taking place over the next two days. This decision will be important one for the underlying currency, which continues to lose against the US dollar.
Since the beginning of the election campaign, LDP leader Shinzo Abe has run on the platform for further monetary easing in boosting economic growth. As a result, central bank leaders have been under extreme pressure from Abe supporters in expanding monetary policy – currently totaling $1.1 trillion.
And, now that Abe has won, further accommodation is anticipated. Expectations are now for the Bank of Japan to leave interest rates near zero, while expanding monetary policy by another $1 billion. Such a move may ultimately jeopardize the independence of the Bank of Japan, as policymakers would be falling into line with the political agenda.
Incidentally, traders will be looking for a change in the inflation target set by the central bank – potentially raising it to 2% from the current 1%. This is another Abe policy that was promised as the government attempts to alleviate the current deflationary environment.
Likely Outcomes
Further Monetary Easing. The measure would ensure additional support for the underlying USDJPY rate as it would translate into further debasement of the Japanese yen. It would also reflect a weaker and more policy dependent central bank, reflective of even more monetary easing to come in the near term. Expect the USDJPY to surge higher towards 85.50 in this case.
Stay on Monetary Easing. A stay on suggestions of further monetary easing will likely weaken the USDJPY pair as it would reflect a central bank maintaining its independence in the face of growing political pressure. The outcome would confirm a separate BOJ agenda, and will lessen the likelihood of additional stimulus going into the end of the Japanese fiscal year. Any weakness will likely target initial support at 83.40.
Source: FXTrek Intellicharts
Since the beginning of the election campaign, LDP leader Shinzo Abe has run on the platform for further monetary easing in boosting economic growth. As a result, central bank leaders have been under extreme pressure from Abe supporters in expanding monetary policy – currently totaling $1.1 trillion.
And, now that Abe has won, further accommodation is anticipated. Expectations are now for the Bank of Japan to leave interest rates near zero, while expanding monetary policy by another $1 billion. Such a move may ultimately jeopardize the independence of the Bank of Japan, as policymakers would be falling into line with the political agenda.
Incidentally, traders will be looking for a change in the inflation target set by the central bank – potentially raising it to 2% from the current 1%. This is another Abe policy that was promised as the government attempts to alleviate the current deflationary environment.
Likely Outcomes
Further Monetary Easing. The measure would ensure additional support for the underlying USDJPY rate as it would translate into further debasement of the Japanese yen. It would also reflect a weaker and more policy dependent central bank, reflective of even more monetary easing to come in the near term. Expect the USDJPY to surge higher towards 85.50 in this case.
Stay on Monetary Easing. A stay on suggestions of further monetary easing will likely weaken the USDJPY pair as it would reflect a central bank maintaining its independence in the face of growing political pressure. The outcome would confirm a separate BOJ agenda, and will lessen the likelihood of additional stimulus going into the end of the Japanese fiscal year. Any weakness will likely target initial support at 83.40.
Source: FXTrek Intellicharts
