USD/JPY Forecast: Will Yen rise again following BOJ rate decision?

Central banks take the centre stage, with the Bank of Japan (BOJ) rate decision due today. The troubled central bank is not expected to tweak JPY 80 trillion per year QE program, interest rates (currently at -0.10%) or yield curve control target. However, a significant majority expects the BOJ to push its 2% inflation target further out into 2018. 

Fading Sun

Bank of Japan’s (BOJ) monetary gamble and Abenomics are nearing an end game. The madness was set in motion after Kuroda came into power back in late 2012. BOJ announced its first bazooka in April 2013… that was followed by a surprise expansion of the QE program in October 2014. 

BOJ milestone decisions

• April 2013 - QE program - To pump $1.4 trillion into the economy in unprecedented stimulus (led to broad based Yen sell-off and risk-on in the broader markets)
• October 2014 - Expansion of QE program - To inject JPY 80 trillion a year into the financial system (led to a broad based Yen sell-off and risk-on in the broader markets)
• Jan 2016 - Pushed benchmark interest rate in the negative territory (Yen bull trap… followed by a massive Yen rally)
• September 2016 - Introduced yield curve control (Yen rally)

From the above data it is quite clearly that the market no longer loves to see BOJ in action. Moreover, the Yen has rallied across the board following the BOJ rate decision this year. The pattern could be followed today as well, unless the BOJ stands pat... Even a minor tweak is unlikely to get positive feedback from the markets.   

No action is good action

For BOJ, no action is good action. Speculation is rife that the Bank of Japan could push out its 2% inflation target to 2018/2019. That could trigger a rally in the Yen, because it reduces pressure to do more in the short-term. Furthermore, markets do not really care about BOJ’s inflation target, given that by now it is crystal clear that monetary expansion alone cannot boost economy/inflation. What is required is structural reforms that are long overdue. 

Moreover, BOJ action would only underscore its exhaustion, hence it makes sense for the central bank to stand pat…and hope the Fed does the heavy lifting in December. 

Stuck between rock and a hard place

The bank also finds itself stuck between the rock and a hard place as - sharp rise in interest rates is undesirable, while flatter yield curve is damaging for the commercial banks. 

No wonder, the central bank introduced yield curve control in September. On this front, the BOJ has little room to do anything other than stand pat. Tapering the QE program is next to impossible (as the resulting sharp rise in yields could lead to financial market instability). Meanwhile, further expansion of the QE program would lead to instability as well. 

On similar lines, neither can the BOJ trim its ETF/stock purchases not can it risk buying more. 

Technicals - Trend line resistance comes into play 
Monthly chart

• The descending trend line drawn from January 2002 high and June 2006 high comes around 105.00 levels. 
• Last month’s candle saw its gains capped by the same trend line resistance. 
• Major resistance - 105.83 (monthly 200-MA), 106.64 (38.2% of 2011 low - 2015 high), 107.50 (July 2016)
• Major support - 104.32 (September high), 103.42 (August close)