Tonight sees the Bank of Japan governor Haruhiko Kuroda take to the stand once more to conclude one of the more hotly anticipated meetings of recent times. The story of Abenomics has gone from fairytale to disaster for Shinzo Abe, with a major weakening in the yen failing to spark the kind of growth and imported inflation many hoped for. Despite a shock move into negative rates in January, markets are increasingly expecting yet another move from the bank in response to deteriorating fundamentals and the repercussions of a major earthquake in Kyushu.
Despite being a nation which is typically well prepared for such natural disasters, the location of this earthquake means that operations from a number of major firms were hit heavily. Toyota, Mitsubishi and Sony are just some of the major firms whose operation were hit, leading to expectations of yet lower growth this quarter.
Growth has been a major issue for Japan of late, with the past three quarters racking up -0.3%, 0.3% and -0.4% readings. Hardly something to get enthused about. With the Japanese yen appreciating heavily in 2016 so far, there is a good chance that growth will once more suffer as Japanese exports become less competitive relative to their international competitors. The yen also has a role to play in generating inflation, which was addressed this month by BoJ governor Kuroda:
'If excessive appreciation continues, that could affect not just actual inflation, but even the trend in inflation through its impact on business confidence, business activity, and even through inflation expectations.'
As such, the yen is the key to generating inflation, growth, jobs and many of the other aspects that Shinzo Abe sought to address when he came to power. Certainly, easing this month could provide an initial devaluation of the yen. However, the January meeting provided us with an example of the fact that markets have very high expectations from the BoJ. Despite seeing the bank cut rates into negative territory for the first time, the yen appreciated significantly in the days following, gaining roughly 2.5% over the next two trading days. As such, it is worthwhile noting that while markets have the propensity to move in a predictable manner prior to a meeting, the reaction to any BoJ action (or inaction) can be much more unpredictable.
Comparing the current USD/JPY price action to that on the day of the March announcement, it is clear that we are in a very different situation this time around. At the time of the March meeting, the pair was at the top of a range, with a clear rejection at trendline resistance three days prior. On this occasion we have seen the pair break back through a crucial resistance level (¥110.66), only to find new support at that level. This portrays a market in ascendancy, despite the fact that we have not broken through ¥11.380 which would indicate a more meaningful recovery in play.
The interesting thing that the BoJ decision should provide is a break higher to keep this perfect ¥110.66 touch intact, or else a break through that level. A closed candle below ¥110.66 would be a bearish signal and could mean the end of this recovery. As such, ¥110.66 is the crucial level which will either hold or break to determine ongoing directional sentiment.
The decision from Kuroda and co will influence this, yet as we saw in March, sometime markets have different ideas irrespective of whatever decision is made at the BoJ.