Bank of Japan (BOJ) preview: Monetary policy to hold steady

The Bank of Japan meeting cuts across July 14-15, expecting no changes to monetary policy while the USD/JPY pair may find the broad risk sentiment a more pertinent driver this week.

Bank of Japan to hold steady through 2020

Despite the BoJ’s latest quarterly regional report that saw assessment across all nine of Japan’s economic region deteriorate, the central bank is expected to hold monetary policy unchanged through to the end of the year. This will include a policy rate at -0.10% amid the negative interest rate policy regime and yield curve control whereby JGBs yield will target at around 0.00%. This comes after a series of measures that the BoJ had put into place to tackle Covid-19 since the global pandemic’s descent upon the Japanese economy.

In the recent June meeting the BoJ had notably brought forth an increase in the estimation of the overall virus package to 110 trillion from the 75 trillion that had been previously projected. Although a technical amendment, it is widely seen as the last major change before the BoJ embark on a wait-and-see mode into Q3. Limits of monetary policy play a big part here, but the BoJ is also expecting gradual recovery into the second half of the year. Nascent signs of recovery had been noted across May and some early June data, although Japan had also seen an increase in Covid-19 cases into July. The central bank will be issuing their outlook report alongside the meeting conclusion, with little expectations of any significant revisions here other than GDP which currently sits at -5.0 to -3.0% against the -4.9% median market consensus surveyed by Bloomberg.

USD/JPY may sustain sideway trade

Absent any surprises from the Bank of Japan, the Japanese yen is expected to continue looking outwards for leads. US Q2 earnings season commencement will be one to watch, but between the improving economic data and Covid-19 case growth, the side-way trade could sustain for USD/JPY. Yield differentials had been kept relatively steady judging from that between US and Japanese 10-year government bonds. Immediate support seen at $106.65 while resistance comes in towards the $108 handle, to keep USD/JPY contained in the near to medium term.

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