USD/JPY eerily calm ahead of BOJ interest rate decision

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at He lives in Nairobi with his… read more.
on Apr 26, 2020
Updated: Apr 28, 2020
  • The USD/JPY pair has been relatively calm in the past week as investors eye BOJ interest rate decision.
  • Analysts expect the BOJ will leave interest rates unchanged and implement an open-ended QE.
  • The BOJ is also expected to expand its corporate bonds and commercial paper purchases.

The USD/JPY pair wavered around last week as investors continued to focus on the deteriorating economy in the United States and Japan. This week, the focus will shift to the upcoming Fed and BOJ interest rate decision.

Japanese yen
Japanese yen has been relatively calm ahead of BOJ interest rate decision

BOJ interest rate decision waited

The Bank of Japan (BOJ) will hold its monetary policy meeting tomorrow and release its interest rate decision on the same day. In a change of schedule released last week, the bank said that the single-day meeting would help it react fast to the changing economic environment in Japan.

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Economists polled by Bloomberg expect the bank to leave interest rate unchanged at -0.1% in its meeting tomorrow. The base interest rate has been negative since 2016. The bank is also expected to leave its target of Japanese Government Bonds (JGBs) yield at o%. Its actions this week could lead to more volatility in the USD/JPY pair.

The market also expects the bank to make unconventional monetary policies. In an exclusive report last week, Nikkei reported that officials were considering implementing open-ended quantitative easing policy. The paper, which quoted anonymous sources, said that the bank would want to target its annual purchases of bonds at about $742 billion a year.

The BOJ will be the second major central bank to implement such a policy after the Federal Reserve. The impacts of the policy have been immediate. Analysts believe that the open-ended QE has helped the stock market continue to rise. It has also helped expand the Fed balance sheet to a record $6.5 trillion from $3.7 trillion in September last year.

Fed balance sheet
Fed balance sheet has been surging

Similarly, the policy will likely see the BOJ increase its balance sheet exponentially. According to Trading Economics, the bank currently holds assets worth more than ¥604 trillion ($5.6 trillion). This means that the BOJ will hold more assets than the Japanese economy itself.

Other central banks too are expanding their assets significantly. The European Central Bank (ECB) is now implementing a €750 billion QE while the Bank of England (BOE) is buying $230 billion worth of assets. The Reserve Bank of Australia (RBA) has also started to implement a $36 billion QE program.

Meanwhile, according to Nikkei, the BOJ will also start buying corporate bonds and commercial paper from Japanese companies. The goal of this policy will be to support companies weather the current storm. Similarly, a survey by Bloomberg showed that more analysts expect the bank to do more in this meeting.

BOJ interest rate decision Bloomberg Survey
Bloomberg survey ahead of BOJ interest rate decision

As with QE, other central banks are buying these products. Just last week, the ECB said that it would start buying corporate bonds from risky-rated companies. The Fed is also buying billions worth of corporate debt.

Japan economy to face the worst recession in decades

The BOJ decision comes at a time when Japan is facing its worst recession in decades. Data from the Bureau of Statistics showed that the economy slid by 7.1% in the fourth quarter of last year. The bureau attributed this to a tax hike that went into effect in December. Therefore, while the first-quarter data are not yet out, analysts believe that it will be worse.

Recent data from Japan have been disheartening. Data released recently showed that its trade surplus sunk by 90% in March. Another data showed that machinery orders dropped to 2.8% in February while PPI sunk to 0.4% in March. Most importantly, the flash manufacturing data from Markit showed that the PMI dropped to 43.7 from the previous 44.8.

The recently-announced state of emergency has also complicated the outlook for the Japanese economy. Just last week, Toyota announced that it would halve its production for this year. Other manufacturers could follow. As a result, demand for the Japanese yen will likely decline.

As such, even with the recently-passed $1 trillion stimulus package, there are chances that the Japanese economy will slide by more than 20% in the second quarter.

USD/JPY outlook ahead of BOJ interest rate decision

USD/JPY technical outlook

On the four-hour chart, the USD/JPY pair has been moving in a sideways direction. As a result, the amount of volatility has been quite low as evidenced by the Average True Range (ATR) and Bollinger Bands Width. This consolidation has happened at the 38.2% Fibonacci retracement. As a result, this could be the calm before the storm, which implies that a new trend could emerge this week.

Update on April BOJ interest rate decision

In its shortened meeting, the bank decided to increase its purchases of CP and corporate bonds, strengthen of the special funds-supplying operations, and to increase its purchases of Japanese government bonds and treasury bills. You can read the BOJ interest rate decision here.

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