Financial Trading Blog

BOJ and How USD/JPY Could Fare



The BOJ is widely expected to stand pat despite increasing inflationary pressure as Kuroda runs out the clock as the head of the institution.

 

What inflation?

For years - in fact, for the whole tenure of Kuroda as governor - the BOJ has been fighting deflation and desperately trying to get inflation to rise. Now, it is. But for the wrong reasons. Inflation in Japan has been above target for a few months now, but not because of roaring economic growth.

The move in prices is due to, among other things, the sudden drop in the yen's value at the start of the year combined with a global surge in costs for energy and food, which Japan must import. Meanwhile, economic growth has been meagre at best. Given these conditions, it seems that the notoriously dovish Kuroda will stick to an easing policy, although there could be some discussion of easing in the future.

 

The issues going forward

Price action on USD/JPY hints at both a medium-term falling wedge and a short-term rising wedge but has also printed a bearish flag, calling for a downward legging.

Breaking under the lower trendline might expose the previous swing low at 133.50, provided the shorter-term support at 134.50 succumbs to pressure. If there is a bounce at the trendline or earlier, prices might move towards the top trendline near 140.00, with 137.00 and 138.20 acting as interim resistances.

Increased bearish momentum might expose 132.50 in the longer term.

boj-and-how-usdjpy-could-fare-19122022

Key takeaways

Despite weak economic growth, rising inflation, and global costs for energy and food, the BOJ is expected to maintain its current policy. Former Finance Ministry official Nakaso may succeed Kuroda as governor and advocate for gradually moving away from the bond cap and relaxing yield curve control as a first step towards tightening. Inflation in Japan is currently at 3.7% and is expected to rise to 3.9% in November, potentially increasing pressure on the BOJ to address rising prices.

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