Policy on Hold But Forecasts Cut
At the Bank of Japan’s July rate setting meeting, held overnight, the BOJ kept its monetary policy on hold at current levels via an 8-1 vote. However, with downward revisions to its growth forecasts and warnings of downside risks to the economy, the meeting struck a decidedly bearish tone. BOJ board member Goushi Kataoka voted in favour of cutting both short- and long-term rates in a bid to offset the downside risks to the economy. Japanese assets have seen better buying overnight and again at the European open today as traders continue to view further BOJ easing as a likely outcome in the next few months.
“Extremely Severe Situation”
The BOJ now forecasts the Japanese economy to fall by 4.7% over the year with inflation to fall by 0.5% before seeing a recovery in 2021 and 2022. In the statement released alongside the monetary policy decision, the BOJ said: “Japan’s economy has been in an extremely severe situation with the impact of Covid-19 remaining at home and abroad, although economic activity has resumed gradually.”
With monetary policy kept unchanged, the headline interest rate remains at record lows of -0.10% with 10 year JGBs still capped “around zero” as part of the bank’s yield curve control program. In terms of its equity exchange traded funds purchases, the bank will continue with its buying at a steady level of 12 trillion JPY per year.
High Uncertainty in The Outlook
The BOJ’s updated quarterly economic forecasts suggest that the economy will gradually recover from current levels as the country gets back to normal following the extensive lockdowns seen during the height of the pandemic. The BOJ notes that this view “is based on the assumption that a second wave of COVID-19 will not occur on a large scale” though did note that uncertainty within the outlook is extremely high.
In terms of forward guidance, the BOJ advised that: “For the time being, the bank will closely monitor the impact of Covid-19 and will not hesitate to take additional easing measures if necessary,” said the central bank. “It expects short- and long-term policy interest rates to remain at their present or lower levels.”
NIKKEI (Bullish above 21758.9 level)
From a technical viewpoint. The NIKKEI continues to trade higher within the bullish channel which has framed the post-lockdown recovery. Price has been well supported at the 21758.9 level and is well above the 50dma here. However, while the 23273.6 level holds as resistance, downside risks are building. Near term bias remains bullish for now, with 24069.4 the next upside target to watch. Will reassess on any downside breach of the 21758.9 level.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 70% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.