USD/JPY in holding pattern as Abe injects another dose of $1.1T stimulus

USD/JPY in holding pattern as Abe injects another dose of $1.1T stimulus
  • The USD/JPY pair remained in lockdown as Reuters reported on a new $1.1 trillion stimulus package.
  • That amount will bring the total stimulus offered this year to more than $2.2 trillion or almost 50% of GDP.
  • The yen has been little changed this month even as some geopolitical risks rise.

The USD/JPY pair was little changed after the Shinzo Abe administration unveiled another round of stimulus.

USD/JPY
USD/JPY little changed on new stimulus

Japan launches another stimulus

Japan was in an economic crisis even before the coronavirus outbreak this year. The economy contracted by 7.1 per cent in the fourth quarter, partly due to an increase in consumption tax. Capital expenditure and private consumption declined by 4.6 per cent and 2.8 per cent respectively. The decline came even after the government unveiled a $110 billion stimulus package in December.

The contraction continued in the first quarter, when the economy slumped by 3.4 per cent on a year on year basis. Exports declined by 21.8 per cent while household consumption fell by 3.1 per cent. Analysts expect the second quarter numbers to be worse.

The government and the central bank have responded to the crisis in a big way. The BOJ has removed the cap of its quantitative easing and provided billions of dollars in liquidity. Indeed, the BoJ balance sheet is now bigger than the Japanese economy.

Meanwhile, the Shinzo Abe administration has provided trillions of dollars-worth of stimulus. And today, the government said that it is compiling a second extra budget worth more than $1.1 trillion to cushion the economy from pandemic. This will bring the total stimulus offered by the government to more than $2.2 trillion, which is a significant number since Japan’s total GDP is about $4.97 trillion.

Japanese yen remains in lockdown

The Japanese yen has been relatively calm in the past few days. Yesterday, when the US dollar index(DXY) slumped, the USD/JPY pair was unchanged. Indeed, the pair has oscillated between 107 and 108 in the past two weeks. That calmness signals the end of the weak yen era, according to some analysts.

Surprisingly, the yen has been calm in a period when many would expect it to soar. As a safe-haven currency, it should have done well in the past few weeks. The US and China are edging towards a confrontation, Kim Jong Un has talked about boosting his nuclear deterrence, China has passed an unpopular security bill, and Brexit risks are rising.

According to the Financial Times, analysts attribute the yen calmness on several factors. They believe that Trump will not restart a trade war in an election year. Also, the yen is being supported by the low coronavirus death rate in Japan. Also, the risks of Shinzo Abe’s political downfall has been offset by his proven resilience. Additionally, the continued investments in a coronavirus drug R&D has reduced the risks of a prolonged pandemic. In a statement, a JP Morgan analyst told FT:

“We now see the risk of multiyear yen appreciation, following a bias toward yen depreciation seen over the past few years. We also note that during past Japanese economic recessions caused by the global economy, Japanese corporations tended to repatriate nearly all their overseas profits.”

USD/JPY technical outlook

USD/JPY
USD/JPY forecast

The USD/JPY pair is trading at 107.47. On the daily chart, the price is slightly below the 50-day and 100-days exponential moving averages. It is also between the 50% and 38.2% Fibonacci retracement level. Additionally, the price has formed a symmetrical triangle pattern while volatility has declined to the lowest level since February. This means that the pair is waiting for a catalyst, meaning that it will break out in either direction.

By Crispus Nyaga
Crispus Nyaga is a finance analyst and trader with more than 7 years industry experience. He's contributed to some of the leading financial brands in the world including Seeking Alpha, MarketWatch, Forbes, and Investing.com. Crispus has an excellent understanding of global macroeconomic and geopolitical issues, is a big fan of golf, and lives in Nairobi with his wife, son, and nephew.
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