Monday, June 15, 2020

Will the BoJ cut interest rates or expand asset purchases during this week’s monetary policy meeting?

  • Dollar
  • Yen
  • Bank of Japan


Analysts’ Pick: Will the BoJ cut interest rates or expand asset purchases during this week’s monetary policy meeting?

  • The BoJ is likely to keep interest rates unchanged with the yen’s strength fading from earlier in March
  • A large buffer for its asset purchase programs signals that the likelihood of an expansion to asset purchase programs is low
  • There will likely be an increase in its small businesses lending program however, in line with stimulus measures from the Japanese government that was announced in May
  • Downside risks for the global economy surfacing imply that there may be some room for the yen the strengthen

While the Bank of Japan (BoJ) is unlikely to increase the size of its asset purchases or cut interest rates at its monetary policy meeting today and tomorrow, there is room for an increase for its small businesses lending facility. The BoJ's latest program to support lending for smaller businesses was estimated to be limited to 30 trillion yen when last announced. But with the Japanese government announcing additional stimulus measures last month, the central bank looks likely to increase the limits of the program to support the government's stimulus measures.

Overnight Index Swaps signal that the market is only expecting a 25% chance for a rate cut from the BoJ


On the other hand, its other asset purchase programs still have plenty of buffer room before the BoJ is required to expand it. Corporate bond holdings and commercial paper holdings both remain at less than half of its upper limit of 10.5 trillion yen and 9.5 trillion yen respectively. As a result, the likelihood of an expansion to programs outside of the small businesses lending program remains low. This can be further justified by the global economy widely believed to have reached its lowest in March and April, meaning that most global economies are in a recovery stage, albeit at a much slower rate than initially anticipated.

The weakening Japanese yen will also be a contributing factor to the BoJ's decision making in terms of interest rate easing. The Dollar Yen has mostly at a healthy range close to 2019's level. After reaching the low of 102.36 during March, the Dollar Yen has been trading above 106's level, implying that the Japanese central bank is unlikely to be strongly inclined to cut rates further to curb the appreciation of its currency.

USD/JPY trends well above its low of 102.36, giving little reason for the BoJ to cut interest rates further


An expansion to its lending program should still put some downward pressure on the yen during the announcement, but the impact of the decision may be temporary. Demand for the Japanese yen's safe haven properties will also likely be the highlight of the week, with multiple reports of spikes in Covid-19 infections in countries or states that have eased lockdown restrictions. China reported that a new cluster was found in Beijing, of which 36 of the 38 local cases on Sunday had connections to. In the US, multiple states had seen a spike in Covid-19 cases as well, possibly accelerated by the growing numbers of nationwide protests. Tokyo reported 47 new Covid-19 cases on Sunday as well, the most since May 5th. As more spikes in Covid-19 case surface, investor optimism should continue to ease as reality sets in that the likelihood of a second wave of Covid-19 infections is relatively high. It should as a result increase risk aversion and put some upside pressure on the Japanese yen, although a sharp appreciation in the yen is unlikely since gold may possibly command a higher demand during this period, with governments across the world conducting unprecedented levels of stimulus.

Spikes of Covid-19 cases may put pressure on investors optimism for an economic recovery


The outlook for the yen over the week is hence slightly tilted to the upside, with some possible downside potential on the announcement of the BoJ's monetary policy tomorrow. As a result, the Dollar Yen is expected to retest the 107.43 resistance and likely break it to rise closer towards the 107.77 level on the announcement of the BoJ's decision. Over the week, risk aversion may rise however, and push the yen back down towards 107.08's level and possibly to 106.87's level. Breaking the 106.66 support level looks to be unlikely this week however, since a likely improvement in retail sales data in the US may put some upward pressure on the greenback.

Technical Analysis:


A sharp drop in the Dollar Yen below the 200-day SMA and 50-day EMA signals that bears are currently still in possession of the currency pair. It did however shift from an overbought to an oversold level in the RSI, which implies that there was a surge in volatility in the currency market last week. Volatility has seemingly eased however, and the Dollar Yen may trade within a range of 107.08 to 107.43 in the short-term as a result. On the BoJ’s monetary policy announcement, the yen is likely to weaken, which could put upward pressure on USD/JPY, possibly retesting the 38.2% Fibonacci retracement level at 107.43 and likely breaking it. It may however be temporary as a result of both downside risks and possible profit taking at that level.

Support: 107.076 / 106.88 / 106.67

Resistance: 107.43 / 107.77 / 108.09

USD/JPY Chart (H4)