USD/JPY ranging as Japan’s economy is “past the worst”

USD/JPY ranging as Japan’s economy is “past the worst”
  • The BoJ estimates economy contraction of 4.7% in the 12 months through March 2021
  • Governor Kuroda said the worst is over for Japan’s economy but warned that the recovery could be lengthy
  • USD/JPY is mostly trading sideways as the dollar suffers across the board

USD/JPY price has continued to range this week as investors seem to have taken a break after a volatile few months. Separately, BoJ’s Governor says that Japan’s economy is past the worst.

Fundamental analysis: The lengthy recovery ahead

Haruhiko Kuroda, Governor of the Bank of Japan (BoJ), said the worst is over for Japan’s economy. Still, Kuroda warned that the recovery process could take some time.

The bank estimates economy contraction of 4.7% in the 12 months through March 2021. The economy declined around 3-5% in April this year.

Kuroda made the statement following BOJ’s decision to leave its interest rates and asset purchases unchanged last Wednesday and published updated forecasts. The BOJ expects a sharp decline this year, followed by a slow recovery over the next two years.

The Governor said consumption of goods and production have bottomed, saying that there’s a surge in economic activity after the country lifted its state of emergency.

“But it’s a deep trough so while the speed of rebound is fast for now, I’m not optimistic that the pace will continue,” Kuroda said. “I believe the recovery following that will be gradual.”

BOJ’s recent decisions and forecasts indicate that the central bank is seeking for a stable policy pattern while closely monitoring coronavirus developments, corporate solvency, unemployment numbers as well as market stability. 

Japan’s central bank made no policy changes in its last two meetings, as opposed to a number of actions the bank took during the early stage of the epidemic when it increased purchases of corporate bonds and stock funds, promised to purchase enough government debt to maintain low yields and launched two lending programs for companies in need. 

“The economy is far from normalizing. The BOJ is looking to monitor the effectiveness of its current policy measures, as it does what it can,” said Nobuyasu Atago, chief economist at Okasan Securities and a former Bank of Japan official. 

“The BOJ isn’t in a position to be taking additional action like deepening its negative rate, which would cause side effects”.

Technical analysis: USD/JPY ranging 

USD/JPY price has continued to range in July despite the overall improvements in the risk sentiment. The price action is moving lower in a mild fashion as the dollar heads lower across the board. 

USD/JPY daily chart (TradingView)

The $108 handle remains resistance for the buyers, although this is an unlikely path for the price action. The dollar seems primed to head lower in the coming weeks as USD/JPY sellers eye a move towards the horizontal support at $106.10. 

Summary

USD/JPY price is trading mostly sideways this week after the BoJ left its interest rates and asset purchases unchanged. Haruhiko Kuroda noted that the hardest hit is behind Japan,  although the recovery will take some time.

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