Yen Falls After a Dovish Statement from BOJ

The Japanese yen declined in overnight trading after Bank of
Japan released its interest rates decision. The bank left interest rates
unchanged and lowered its inflation rate target. As expected, the central bank
left rates in the negative territory and didn’t show signs that it will hike
this year. The country has maintained negative interest rates for almost ten
years. Seven officials voted to leave rates unchanged while 2 others voted to hike.
It also reaffirmed its plans for extending the quantitative easing program that
entails buying government bonds to maintain a ten-year yield of around zero.

On inflation, the bank lowered the core CPI to between 1%
and 1.3% in 2019. This was a lower forecast than the previous guidance of
between 1.5% and 1.7%. The guidance is still below the target of 2.0%. In the
statement, the bank said that:

The rate of change in the
consumer price index has been positive but continued to show relatively weak
developments compared to the economic expansion and the labour market
tightening.

The challenge for Japan is that while the economy is doing
well, it has not translated to higher inflation growth. This is because most
Japanese people prefer staying in one company for a long time. As a result, a
tightening labor market does not necessarily lead to higher wages. In addition,
the people prefer saving than spending money. To solve the situation, the leadership
has created additional holidays, which they hope may encourage people to spend
more. Another challenge is that the country is about to increase taxes this
year on a number of products. This makes it difficult for the BOJ to hike
rates.

At the same time, the ultralow interest rates mean that the
central bank has limited tools to calm the markets in case of a major
recession.

After the BOJ rates decision, the USD/JPY pair rose to an
intraday high of 109.80. This level is closer to the monthly high of 109.88. The
price is above the three-week and six-week EMAs. There is a possibility that
the pair will continue moving higher to test the important resistance level of
110.

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