The yen strengthened to a six-week high against the U.S. dollar and all other its G-10 peers, dragging down shares in Tokyo as the Bank of Japan reduced buying of long-dated bonds. The USD/JPY crashed roughly 1.09 percent to close at ¥112.647 on Wednesday, a biggest drop for the past six weeks.
The market’s reaction on Tuesday’s reduced buying of long-dated bonds by the BOJ illustrates growing concerns over when the BOJ will turn towards policy normalization. Economists cautioned against reading too much into the BOJ’s bond buying, but with Japan’s economy in its longest expansion since the mid-1990s, expectations are rising that the BOJ will join its global peers and begin normalizing policy as soon as this year.
According to Allen Sinai, the president of Decision Economics Inc., Japan’s economy will exceed its growth forecast this year, prompting the central bank to take tightening monetary policy into consideration by mid-year. He expects Japan’s economy to grow 2 percent in 2018, and even faster in 2019, perhaps as much as 2.5 percent.
Inflation remains well below 2 percent target set by the BOJ, but the central bank’s preferred gauge rose steadily throughout last year, hitting 0.9 percent in November. Sinai said he expects inflation to reach 2 percent before the BOJ’s projected time frame of “around” the fiscal year beginning in April 2019.
The central bank won’t raise interest rates just because the economy is doing well because its ultimate target is inflation, said Haruhiko Kuroda, the Governor of Bank of Japan.
The broad outlook for the USD/JPY remains bearish, as the pair is still in the downward trend started from May, 2017 and likely keeps moving through such tunnel. While for the short-term period, it also can be seen as a bearish market as well since the significant pullback yesterday led to a breakout lower of previous level depicted as a red channel, and then further decline may occur.
Currently investors can keep close eyes on a key support found on Nov. 27’s low. If the pair continues to decline to this support level and keeps breaking out lower, they could see some drops later.
On the daily chart with RVI (10) and MACD applied, they are both in the descending momentum, showing that further upward momentum may continue.
Figure 1: USDJPY Daily
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