USD/JPY forms bearish pennant after BOJ interest decision

The USD/JPY pair rose after the Bank of Japan (BoJ) delivered its interest rate decision. The pair is up by about 0.20% and is trading at 107.50.

USD/JPY rises after BOJ decision

BoJ interest rate decision

The BoJ became the first major central bank to deliver its rate decision this week. As most analysts were expecting, the bank left the main lending rate unchanged at -0.10%. The rate has been in the negative territory since 2016.

As part of its response to coronavirus, the bank’s members also voted to continue with its yield curve control program. In this program, the bank is aiming for the yield of the ten-year Japan Government Bonds (JGBs) to be at around zero percent. The bank achieves this by investing as much money as necessary to keep rates at the target.

As part of the open-ended quantitative easing program, the bank placed upper limit of ETFs and REITs at 12 trillion yen and 180 billion yen, respectively. Similarly, the bank is acquiring CPs and corporate bonds at about 2 trillion yen and 3 trillion yen, respectively.

In the statement, the bank lamented about the state of the Japanese and the global economy. The bank said:

“Japan’s economy is likely to remain in a severe situation for the time being due to the impact of COVID-19 at home and abroad, although economic activity is expected to resume gradually. The economy will likely improve, supported by accommodative financial conditions and government support measures.”

On inflation, the Bank of Japan expects it to remain negative this year, partly due t lower oil prices. The Kuroda-led bank expects that the quantitative and qualitative monetary easing program will help it achieve the target inflation rate of 2%. The QE has been substantial as you can see below.

Bank of Japan balance sheet

Difficult times for Japan

The USD/JPY pair has moved in a sideways direction in recent past because of the developments in Japan and around the world. Prior to the BOJ interest rate decision, the currency pair was in a downtrend due to several risks. For example, there is a risk of a second wave of coronavirus. Also, there is a risk of a conflict between South Korea and North Korea.

For starters, the Japanese yen tends to be viewed as a safe-haven currency that gains when risks emerge. That is usually because of the large holdings that Japan has invested in abroad. For example, it is the largest holder of US treasuries and one of the biggest foreign investors in the world.

At the same time, a strong yen is undesirable in Japan, a country whose exports represent a substantial amount of the economy.

In recent months, the Japanese government and the BOJ have implemented substantial stimulus plans. For example, the government has launched several stimulus packages worth more than $1.1 trillion.

Still, most companies in Japan are in trouble. For example, automakers like Honda, Toyota, and Nissan, have all slashed jobs, idled plants, and reduced production. Other industries have also suffered. Subsequently, the country is now in its third straight quarter of negative growth.

USD/JPY technical outlook

USD/JPY technical analysis

The USD/JPY pair is trading at 107.50. On the daily chart, the price is slightly below the 50-day and 100-day exponential moving averages. It is also between the 50% and 61.8% Fibonacci retracement level. Also, the pair has formed a bearish pennant pattern, which implies that it may resume the downward trend. If it does, the likely scenario is that the pair will test the important support at 106.00.

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