Bank of Japan (BoJ) preview: Outlook report in focus

BoJ upcoming monetary meeting

Going into the BoJ monetary meeting this week, no major surprises are expected as the central bank may refrain from any policy adjustments in light of renewed virus resurgences. Consensus expectations point to the BoJ keeping in place its target of -0.1% for short-term rates and 0% for the ten-year bond yield, under its policy of negative interest rate policy (NIRP) and yield curve control (YCC). The accommodative stance has been largely laid out by Governor Haruhiko Kuroda who reiterated the central bank’s readiness to ease monetary policy further if needed to deal with the pandemic impact.

Thus far, Japan has only close to 29% of its total population being vaccinated, lagging far behind other developed nations and causing more vulnerability in terms of Covid-19 risks. Renewed restrictions ahead of the upcoming Olympics may likely lead to a downward revision in GDP growth forecast in the upcoming outlook report. On the other hand, inflation may stay muted, with recent core CPI in May coming in at 0.1%, still far below the central bank’s inflation target of 2%. The BoJ only expects core consumer inflation to hit 0.8% in 2022 and 1.0% in 2023, with inflation risks of least concern to drive any action from the central bank.

While the manufacturing sector may remain resilient from strong exports, the recovery in the services sector may drag on. Japan’s services PMI has remained in contractionary territory since February 2020. That said, the general consensus is that economic recovery will ultimately take place as vaccination continues and virus cases ease. On another note, investors may also look out for details on the central bank’s new scheme to boost funding for activities related to climate change.

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USD/JPY trading within an ascending channel pattern

Over the past week, the USD/JPY (大口） has dropped as much as 1.9% from its one-year high as falling US Treasury yields led to lower yield differentials between the two countries’ government bonds. While that may weigh on the USD/JPY, the currency pair has been trading within an ascending channel pattern since late-April and recent attempt to break below the lower trendline of the channel pattern has been unsuccessful.

The 109.53 level has provided a near-term rebound, where the currency pair found support at its 100-day MA, in coincidence with the Fibonacci 22.6% retracement level. Near-term resistance may be at 111.0, where prices were resisted on previous two occasions.

Japan 225 index forming series of lower highs

The Japan 225 index seems to be weighed down by a downward trendline connecting a series of lower highs since February. The 28,600 level may be a key support level to watch, with the index being supported on five previous occasions. Near-term resistance may be at 29,000, where the downward trendline will come into play once again.

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