BOJ Preview: Economic forecasts downgrade and hints on December move

The Bank of Japan (BOJ) is likely to stand pat on its monetary policy settings when it concludes its two-day review meeting on Thursday. Although the policy announcement may not be market-moving, investors will pay close attention to the Japanese central bank’s quarterly outlook report and future policy guidance.

Japan PM Suga to unveil fresh fiscal stimulus

Prime Minister (PM) Yoshihide Suga’s new government is set to compile an additional budget to counter the coronavirus pandemic-caused economic damage. According to media reports, the administration is likely to finalize an extra budget worth around JPY10 trillion ($95.5 billion) around mid-December.

Suga is seen following former Prime Minister Shinzo Abe’s policy, Abenomics, with instructions on the economic measures and benefits likely to be announced next week. The extra budget could be used to extend a labor subsidy program scheduled to end in December and to pay for the distribution of a coronavirus vaccine.

BOJ to maintain status-quo, December move in focus

The BOJ board members are expected to keep rates unchanged at -10bps while maintaining a 10yr JGB yield target at 0.00%. However, the bank is seen extending the deadline for two virus-linked funding programs and enlarged asset purchases at the meeting.

Alongside the policy announcement, the central bank is seen downgrading this fiscal year's economic and inflation outlooks in its quarterly assessment report. The lowering of the growth forecasts is in lieu of the bigger-than-expected economic slump in April-June and soft consumption while the inflation downgrade is largely due to the impact of a government campaign offering discounts to domestic travel, in a bid to boost tourism.

Although the outlook reviews are already priced-in by the markets, any hints on additional monetary policy easing in December, by way of fresh quantitative easing (QE), could have a significant impact on the yen.

Industry experts believe that the BOJ could work with Suga’s government to stimulate the economic recovery but only after the November US Presidential election.

USD/JPY technical outlook

Heading into the BOJ decision, the risk-off flows and US dollar dynamics remain the main market drivers and the scenario is unlikely to change following Thursday’s policy announcement.

The second wave of coronavirus accelerating across the globe and pre-US election anxiety seem to be boding well for the anti-risk yen, as we write. USD/JPY sits at the lowest levels in five-week just above 104.00.

On the daily chart, USD/JPY remains vulnerable to deeper declines. The immediate support of the three-month-old descending trendline, seen at 103.87, could be put at risk on any policy efforts by BOJ to boost the economic rebound.

If the announcement turns out to be a non-event, investors could use it as an excuse to embark upon a corrective pullback towards the 105.00 level, above which the next resistance awaits at the 21-daily moving average (DMA) hurdle of 105.27.

The 14-day Relative Strength Index (RSI) points south within the bearish zone but holds just above the oversold territory, suggesting that there is still some room to the downside.