USD/JPY holding around the 109 handle as markets take a deep breath

USD/JPY is currently trading at 108.70 following benign Federal Reserve's minutes and a relatively subdued session in New York so far. USD/JPY has traded wth a range of between 108.50 and 109.10. 

First of all The Fed's minutes came with little market reaction, showing the committee's concerns over the crisis at hand with plenty of uncertainty among board members. 

• FOMC minutes: All participants viewed near-term economic outlook as having deteriorated sharply

FOMC minutes and key points

• Appropriate to maintain rates at zero until economy has ‘weathered’.
• "Many participants had repeatedly downgraded their outlook of late in response to the rapidly evolving situation."
• "All saw US economic activity as likely to decline in the coming quarter and viewed downside risks to the economic outlook as having increased significantly."
• "Participants noted that the timing of the resumption of growth in the US economy depended on the containment measures put in place, as well as the success of those measures, and on the responses of other policies, including fiscal policy."
• Meanwhile, the Fed's massive QE program has historically been associated with a suppression of real rates and gold is looking sturdy north of $1,600. 
• Analysts at TD Securities explained that "it is still too early to say if we have entered the recovery phase just yet, with the risk of another containment induced deflationary shock still elevated, but recent price action has done well to firm upside momentum signals."

Meanwhile, COVID-19 continues to play havoc for Japan as cases force the nation to submit to an official state of emergency. The JPY has lost ground against all G10 currencies except the USD on a 1-day view as risk ebbs and flows between positive to negative. US stocks have been trying to recover, but on thin air, although the yen has suffered as a consequence.

Also, there are questions over whether the Japanese economy can hold up on already fragile foundations. This week’s announcement from PM Abe of a stunningly large stimulus package worth around 20% of GDP has clearly refocused attention back on how easily the government will fund this.

"Japanese economic fundamentals are often defined by the high level of government debt and a rapidly ageing population, but there has been no bursting of the bond bubble," analysts at Rabobank explained.  

Rather than dissolve into hyperinflation as many critics of Japan’s fiscal policies in the 90s predicted and several critics of QE have subsequently forecast, weak wage growth and persistent battles with disinflation have persistently characterised Japan’s economy."

Traders will be of the opinion that Japan is headed into a deep recession no matter the size of the stimulus package and data is likely to be hugely disappointing. The playing field is highly supportive for the USD so long as volatility say elevated. This exposes the mid 109 handle and 112 in the medium term. 

USD/JPY levels

USD/JPY Forecast: Consolidative phase continues as mood deteriorates