Monday, January 20, 2020

BoJ looks set to hold rates but it may revise its growth outlook

  • Dollar
  • Yen
  • Bank of Japan


Analysts’ Pick: BoJ looks set to hold rates but it may revise its growth outlook

  • The Japanese government’s fiscal stimulus package and this year’s Tokyo Olympics relieves BoJ’s pressure for monetary stimulus
  • Reduced geopolitical risk will also put downward pressure on the yen, boosing Japanese exports
  • BoJ’s Growth outlook is expected to be revised upwards, driving the yen higher

The fiscal stimulus package of about 26 trillion yen from the Japanese government is likely to drive the economy for the year ahead. It may also help the relieve pressure off the economy from last year's tax hike and damage from Hurricane Hagibis. Coupled with the 2020 Tokyo Olympics that is expected to drive tourism in Japan, the BoJ should have some breathing room for monetary policy for the year. But while the stimulus package will lift some pressure off the economy, it is still possible that Japan will face a slowdown in 2020.

Japan’s leading index signals increased risk of recession moving into 2020


Geopolitical risk across the globe has also reduced, thanks to the US-China phase one trade agreement that was signed last week. Demand for the yen as a safe haven asset has fallen over the past weeks leading up to the signing of the US-China phase one agreement. Improving economic data also signals that global business sentiment is picking up. China's GDP growth remained at 6% for Q4 and industrial production for December in the Chinese economy beat estimates and grew at 6.9% from 6.2% in November. Retail sales and housing starts in the US also performed better-than-expected in December. The more positive outlook for business sentiment is likely to put less pressure on the yen, which will also drive Japanese exports.

With volatility continuing to fall, expect USD/JPY to extend its gains


As the BoJ is unlikely to change current rates, focus will be on its economic forecasts instead. The growth outlook for Japan is expected to be revised upwards to reflect the effects from fiscal stimulus and the expected boost in tourism from the Tokyo Olympics later this year. The effects will likely spillover to 2021, although 2021 may face downside risk as a result of the large stimulus package for 2020.

We expect BoJ to revise its growth forecast upwards at this week’s policy meeting

Forecast for fiscal year




As of

Oct (A)

Jan (F)

Oct (A)

Jan (F)

Oct (A)

Jan (F)

Real GDP







*Source: ADSS, Bloomberg
**Where (A) stands for Actual and (F) for Forecast

But the BoJ will probably continue to manage expectations in order to control the yen from increasing too much. USD/JPY is expected to inch lower past 109.84 as a result of the BoJ’s decision. But the Dollar Yen may recover over the week as investors continue to shift to more risky assets thanks to reduced geopolitical risk.



Effect on USD/JPY


BoJ holds rates; revises growth outlook upwards while maintaining dovish stance

Fall slightly past 109.84


BoJ holds rates; keeps growth outlook constant while maintaining dovish stance

Continue to range within 109.84 and 110.20


BoJ holds rates; revises growth outlook upwards without dovish stance

Falls past 109.84’s level towards 109.65

*Source: ADSS

Technical Analysis:         


Bulls continue to charge forward as it constantly tries to retest the 110.20 resistance level. With the US-China phase one trade deal signed, risk aversion in the market has reduced, prompting a sell-off in the yen. The RSI and ADX both confirm this, with being at or near the overbought level of 70 and ADX holding above 25. This signals that USD/JPY may have room to fall. This week's BoJ monetary policy meeting may be what the bears need to keep the Dollar Yen from a possible surge. But if the bulls break past 110.20’s level, expect momentum to drive the Dollar Yen, possibly towards 110.50's level.

Support: 109.84 / 109.65 / 109.32

Resistance: 110.20 / 110.50 / 110.75

USD/JPY Chart (H4)