USD/JPY volatility sinks to 6-month low after BOJ interest rate decision

The USD/JPY pair is little changed today as traders reflect on the Bank of Japan (BOJ) interest rate decision. The pair is trading at 107.30, which is slightly above Friday’s low of 106.62.

Bank of Japan interest rate decision

The Japanese economy has been making a slow but steady economic recovery as evidenced by recent economic data. Last week, data by the statistics office showed that household spending declined by 0.1% in May. Another data by Markit showed that the manufacturing sector made a modest recovery in June.

It is against this backdrop that the Bank of Japan held its monetary policy meeting in the past two days. In its decision, the bank voted 8-1 to leave the short-term interest rate at -0.10%, as most analysts were expecting.

The bank also voted to leave its yield curve control policy intact. This means that the bank will buy as much government bonds as possible in its bid to maintain the yield of the 10-year at zero.

On the asset purchases, the bank decided to set the limit of exchange traded funds (ETFs) purchases to about 12 trillion yen. The limit of Japan real estate investment trusts (J-REITS) will be about 180 billion yen. Meanwhile, the BOJ will leave the outstanding purchases of commercial paper and corporate bonds at 2 trillion yen and 3 trillion, respectively.

BOJ economic outlook

Meanwhile, the BOJ pledged to continue supporting firms through the Special Program to Support Financing in Response to the virus. It will also ensure that there is enough yen in the market and by actively purchasing ETFs and J-REITs. The statement said:

“For the time being, the Bank will closely monitor the impact of the COVID-19 and will not hesitate to take additional easing measures if necessary, and also it expects short- and long-term policy interest rates to remain at their present or lower levels.”

The USD/JPY also reacted to BOJ’s outlook for the economy. In the statement, the members said that they expect the economy will shrink by 4.7% this year. In the last meeting, they said that the economy would weaken by between 3% and 5%. The statement said:

“Thereafter, as the impact subsides globally, the economy is projected to keep improving further with overseas economies returning to a steady growth path.”

Other central banks have recently decided to maintain status quo. Last week, the RBA left interest rate unchangedas the Australian economy improved. Also, analysts expect that the Bank of Canada and ECB will not implement many changes when they meet today and tomorrow.

USD/JPY technical outlook

The USD/JPY pair is trading at 107.25. On the daily chart, the price is slightly below the 50-day and 100-day exponential moving averages. It is also between the 50% and 61.8% Fibonacci retracement level. Also, the Average True Range (ATR), which is an important measure of volatility, has fallen to the lowest level since February last year. Therefore, this means that the pair could make a significant break out in either direction in the near term.