The yen changed hands higher than the U.S. dollar ahead of the central bank meetings scheduled later this week. After the slight recovery the previous week, the U.S. currency lost the rhythm against a basket of currencies during the morning session.
As of 16:20 UTC, USD/JPY traded lower at 101.73, away from the previous 102.30 last Friday. The pair opened at 101.744 with an Intraday high of 101.810 and an Intraday low of 101.711. With over 681 traded volume, the pair closed at 101.752.
As you can see in the chart above, the greenback is still losing against the yen and the trend may continue until the latter part of the session. The pair remained on contracting with a tight trading range. High volatility is unlikely to happen, as the pair goes beyond the lower barrier. The trend remains weak, a good news for the yen, but a backlash to the greenback.
Central Bank Meeting
Investors have been too cautious ahead of the central banks’ meetings. The Federal Reserve and the Bank of Japan were a few days away from their respective policy meetings. In general the global market remains volatile at the moment due to the uncertainties over market events and the mixed expectations.
The Bank of Japan is scheduled to report its benchmark interest rate and rate statements on Wednesday. The central bank of Japan may adjust its monetary easing and increase its asset purchase program in line with the economic and inflation targets.
As shown in the two-day monetary policy meeting last July, the BoJ decided, by a 7-2 majority vote, to continue applying a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank.
Additionally, it indicated “The Bank will continue with "QQE with a Negative Interest Rate," aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner.”
In terms of asset purchases, the BoJ is focused on buying Japanese government bonds with an intention to increase the amount standing at an annual pace of around 80 trillion yen. Further, it would purchase Japan real estate investment trusts to amplify the amount outstanding at an annual pace of 90 billion yen. Meanwhile, the CP and the corporate bonds was kept at 2.2 trillion yen and 3.2 trillion yen.
One of the major concerns right now is the impact brought by the negative interest rate to the commercial banks. According the people knowledgeable in the matter, members of the banks are looking for a possibility to extend yields on debts for 20 years or even longer as the banks’ bond purchases are pushed up to shorter government debt.
These emerging issues over the financial firms and the government could delay the initial plan of the BoJ to cut rates further. The policy assessment may include the current economic conditions and the finality of the measures to meet the ever 25 inflation target.
As the investors look ahead of the central bank meetings, the Japanese yen will likely stay higher against the U.S. currency. Most probably, the central bank of Japan may choose to pursue low interest rates to stimulate demand and economic growth.
Lack of growth in the Japanese economy affects the trend of the yen. For the first half of the year, the Cabinet office revealed that the growth in the economy came better than expected with an annual growth of 0.7 percent.
However, it seemed the economy was far from its previous stagnant stage already in this third period of the year. It all started with the 0.2 percent advance of the gross domestic product during the second quarter phase of 2016. The private consumption went up 0.2 percent, while private capital expenditure contracted by 0.1 percent. It has been decades, and the land of the rising sun still aims for the stable growth of the economy.
All there’s a pinch of hope, the greater participation of the government is not enough. The famous Abenomics sounded promising in its first year, but as Shinzo Abe’s governance prevails, the stimulus lost its track in delivering significant development in the economy.
Economic stability is an important factor for the central bank in deciding the adjustments in the monetary policy. Growth would mean a chance to finally stretch up the rates, and higher rates would be equal to currency appreciation. Considering the huge strength of the yean in the previous months, this may be out of the table of the BoJ. Staying in the negative territory would be the choice of the central bank of Japan this coming Wednesday.
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