Forex Analysis & Reviews: 25.01.2023 - The Bank of Japan will...

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25.01.2023 12:10 PM

The Bank of Japan will continue to adhere to a soft policy

According to the former executive director in charge of monetary policy during the epidemic, the US dollar is aggressively losing ground against the Japanese yen. However, the Bank of Japan is likely to gradually end emergency measures to stabilize the yield curve once the new governor assumes office in April of this year. This is because the emergency measures will likely last for several months. Former director Eiji Maeda stated in an interview that "it is likely that the Bank of Japan will take steps within the first six months after the election of a new governor." Despite this, the regulator "is likely to continue to maintain a soft monetary policy to keep bond yields low" even if the YCC is finished and the negative interest rate resumes a positive trajectory.

As Japan transitions away from an economy where inflation has been near zero for a considerable amount of time, according to Maeda, a former senior economist at the Bank of Japan, the country is on track to end persistent deflation. Additionally, it presents the Bank of Japan with a chance to stop using aggressive stimulus measures. "The economy is beginning to experience moderate inflation, which lessens the urgency for taking quick action. There is a chance that pricing pressure could develop in the vicinity of 1% to 1.5%," added Maeda.

Let me recollect that the Bank of Japan governor, Haruhiko Kuroda, spoke out against a vigorous market assault on the Bank of Japan's incentive scheme exactly one week ago. After the Central Bank's unexpected move to boost the target rate on 10-year notes to 0.5% in December last year, speculation about a potential policy change started to emerge.

However, as the majority of experts point out until Kuroda steps down on April 8, more adjustments are unlikely.

Maeda added that a major factor in the December decision was the yen's excessive volatility. In addition to increased foreign currency rate volatility and a decline in market liquidity, YCC has "major side consequences," according to Maeda. He asserts that the bank won't abruptly end its easy policy. Instead, it's more likely that the phase-out will be followed by an increase in bond purchases and an adequate flow of cash to the financial markets. Options are quite likely, including a further 25 basis point widening of the yield range, which would mark the beginning of the end for YCC.

During its subsequent policy normalization step, the Bank of Japan "may announce the phase-out of the YCC and pledge to maintain the bond yield ceiling at 0.75%," according to Maeda.

Regarding the USD/JPY's technical picture, it is clear that the dollar is actively losing ground versus the yen. A breach of the support level of 126.35 might put more pressure on the trading instrument, which could result in a bigger sell-off between 124 and 121.30. Only after the US dollar has regained control over the resistance level at 131.60 will it be possible to discuss an upward correction and strengthening of the greenback. This could cause a stronger upward move in the area between 134.70 and 138.30, where large dollar sellers have returned to the market.

Regarding the technical analysis of EUR/USD, there is still demand for the single currency, and there is a potential that monthly and annual highs will continue to be updated. To do this, the trading instrument must remain above 1.0860, which will cause it to move to the vicinity of 1.0930. You can easily get through this point to reach 1.0970 when an update to 1.1007 is imminent. Only the collapse of support at 1.0860 will put more pressure on the pair and drive EUR/USD to 1.0805, with the possibility of dropping to a minimum of 1.0770 if the trading instrument declines.

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*Disclaimer: The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.