USD/JPY retreats as the gap between BOJ and Fed widens

The USD/JPY pair declined for the second straight day as investors reflected on the latest Bank of Japan (BOJ) interest rate decision. The pair fell to 110.18, which was 0.60% below the highest level on Thursday.

Bank of Japan decision

Recent economic data from Japan have been relatively strong, helped by the strong international demand. The country’s retail sales have done well while manufacturing and industrial production have improved. 

It is against this backdrop that the BOJ held its monetary policy meeting. In its statement of monetary policy,  the ban voted unanimously to keep interest rates low. The bank also voted to continue the asset purchase program by another 6 months to March 2022.

The BOJ will also continue with its yield curve control program. In it, the bank is purchasing government bonds without an upper limit to ensure that the yield of the 10-year remains at around zero percent. 

Further, the bank expects that the country’s inflation will remain around 0% in the short run and then increase gradually. The decision came a few hours after the country published the latest inflation data. The numbers revealed that the national consumer price index increased from -0.4% in April to -0.1% in May. The core CPI that excludes volatile items increased from -0.1% to 0.1% in the same period.

The USD/JPY declined as a gap started to emerge between the Fed and the BOJ. In its interest rate decision this week, the Fed left interest rates and quantitative easing policy unchanged. It also expects to start raising rates in 2023. The tapering of asset purchases is expected to come later this year. This divergence is natural since the Japanese economy has emerged from the pandemic at a relatively slower pace than the US and China.

USD/JPY technical analysis

The four-hour chart shows that the USD/JPY pair has declined in the past two days. The pair has moved below the upper side of the ascending channel and is still above the 25-day and 50-day moving averages. It is also slightly above the Ichimoku cloud while the Stochastic and Relative Strength Index (RSI) has moved below the oversold level. Therefore, the pair will likely keep falling as bears target the next key support at 110, which is a psychological level.