USD/JPY struggles to find stability following BoJ lending update

The USD/JPY found itself trading down 0.25% after the Bank of Japan unveiled an additional US$300 million in financial aid.

The USD/JPY forex pair was down 0.25% after the Bank of Japan (BoJ) committed an additional 45 trillion Japanese yen (US$300 million) to helping struggling businesses tide over the Covid-19 period.

Japan’s central bank to pump in an extra US$300 million in loans

On Tuesday 16 June 2020, Japan’s central bank announced that an additional fiscal stimulus of up to 110 trillion Japanese yen (US$1 trillion) will be made available, if the maximum amount of loans is approved via its various financing schemes. This is larger than the 75 trillion Japanese yen emergency package – the government’s second this year – unveiled in May 2020.

The BoJ also left interest rates unchanged following an 8-1 vote in favour of the status quo. Additionally, Japan’s central bank has also decided to let its yield curve control for 10-year Japanese government bonds (JGB) stay at -0.1% for short-term interest and 0% for long-term rates.

The central bank revealed that it will continue to purchase back more JGBs in order to pump more liquidity back into the economy, during a crisis that it has dubbed as ‘extremely severe’.

‘Given markets have calmed down and the economy appears to be bottoming out, there’s no reason for the BOJ to take action anytime soon,’ Hiroshi Shiraishi, senior economist at BNP Paribas Securities, told Reuters after the announcement was made.

‘Fiscal policy will play a main role in responding to the virus fallout, so the central bank will continue to indirectly help the government by keeping borrowing costs low.’

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The BoJ is one of many major central banks that have unveiled upwards of US$1 trillion in economic stimulus as a response to the coronavirus pandemic in the last four months.

On Monday 15 June 2020, US central bank – the Federal Reserve – said it will start purchasing corporate bonds on Tuesday through the secondary market corporate credit facility (SMCCF). US President Donald Trump was also reportedly mulling the possibility of a US$1 trillion infrastructure spending plan to boost the economy.

‘Broad situation remains uncertain’: IG analyst

Following the update, the USD fell against the Japanese yen to ¥107.300. As at 09:00 GMT on the same day, the USD/JPY has retraced some of those losses, and is now back above at ¥107.430.

Looking ahead, IG Asia market strategist Pan Jingyi wrote that ‘the broad situation…remains one of high uncertainties, one shared by the BoJ’.

She added that this could also affect equities, with upward price adjustments and possible deviations to be expected in the coming days.

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