USD/JPY pares gains as BoJ holds rates

The Japanese yen posted sharp losses earlier but has almost completely recovered. In the European session, USD/JPY is trading at 157.09, up 0.06%. Earlier, the yen fell as much as 0.80%, dropping to 158.25 and hitting a six-week low before recovering.

Bank of Japan stays cautious, says will trim bond purchases

The Bank of Japan met on Friday and stayed cautious, disappointing the markets that were hoping for more. The BoJ maintained interest rates at a range of 0% to 0.1% and announced that it would start to trim its bond purchases, a move which will reduce its massive monetary stimulus. However, the BoJ said it would not provide the details of its tapering plans until the July meeting, which means that the bond buying pace remains unchanged for now.

The markets were disappointed that the BoJ didn’t announce a rate hike in July or at least signal plans to raise rates. Coupled with the lack of details about trimming bond purchases, the central bank signaled that it will move slowly in adjusting monetary policy. The dovish stance of the central bank at the meeting resulted in the Japanese yen falling sharply lower.

Any plans for the BoJ to tighten policy could be delayed by the weak Japanese economy. GDP contracted in the first quarter by -1.8% y/y and household spending in April contracted by 1.2% m/m in April.
In the US, producer prices were softer than expected in May. PPI fell by 0.2%, below the April reading of 0.5% and lower than the market estimate of 0.1%. Yearly, PPI ticked lower to 2.2%, down from a revised 2.3% in March and below the market estimate of 2.5%.

The soft PPI data comes on the heel of the May CPI report which also decelerated. The decline in these two inflation reports have raised expectations of a September rate cut, with a 61% of a quarter-point cut currently, compared to 46% just a week ago, according to CME’s FedWatch.

USD/JPY technical