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Bank of Japan (BoJ) preview: Covid-19 resurgences on watch

The Bank of Japan is set to kick off their monetary meeting across April 26-27 for the third time this year, with monetary policy expected to remain unchanged as the country battles rising Covid-19 cases.

BoJ expected to maintain stance on easing for longer

Consensus expectations widely expect the BoJ to maintain its target of -0.1% for short-term rates and 0% for the 10-year bond yield, under its policy of negative interest rate policy (NIRP) coupled with yield curve control (YCC). This was also reiterated by BoJ governor Haruhiko Kuroda recently with his comment to ‘continue monetary easing for long period of time via YCC’, suggesting that the policy stance will well remain through 2021.

Event Survey Prior
BoJ policy balance rate -0.10% -0.10%
BoJ ten-year yield target 0.00% 0.00%

Source: Bloomberg

At its previous meeting, the BoJ adopted a more flexible stance on asset purchases by removing its explicit guidance to buy exchange-traded funds (ETF). Since then, the Covid-19 situation in Japan has turned for the worse, with new daily cases surging to its 3-month high at the time of writing. Despite further restriction measures in place to curb virus spreads, one may potentially expect growth to continue, albeit at a slower pace.

This is taking reference to the end of last year when Japan was faced with its third wave of Covid-19, the au Jibun Bank Japan Manufacturing PMI continues to trend higher, denoting expectations for improving economic conditions to remain resilient. That said, further restrictions may slow the pace of recovery in the services sector, where current services PMI still remains in contraction territory. The outlook report to be released after the upcoming meeting will be one to watch, with growth forecasts in focus. Refinitiv estimates point to 1.2% GDP growth in Q2 2021, with full-year growth at 3.9%.

With the BoJ’s policy framework on keeping monetary easing sustainable, improvement in inflation figures towards the 2% target will be closely watched over the coming months. Longer-term, the vaccination pace will remain a key catalyst to economic recovery. With an estimated 0.6% of population being fully vaccinated compared to 28% in the US, Japan will have to convince the markets that it will be able to keep the current Covid-19 situation under control until then.

USD/JPY retraces on stabilising yield differentials

The BoJ meeting will be closely watched next to the Federal Open Market Committee (FOMC) meeting in driving the moves for the pair. The Fed is largely expected to maintain its usual dovish position while the US 10-year yield continues its descent since April, reacting little to a series of robust economic data over the past few weeks.

The yield differentials between US 10-year yields and 10-year JGBs seem to have stabilised after rising to an over 1-year high back in end-March. With a pause in the widening of yield gap, the USD/JPY also retraces in tandem from its 1-year high over the past 3 weeks.

From a technical perspective, the USD/JPY weakness is supported by a bearish divergence on the MACD indicator as the currency pair previously formed higher highs. This points to weakening momentum to the upside in the near term. Should the pair retrace further, key support level to watch may be the 106.60 level, where one may find potential support from the Fibonacci 50% retracement level in coincidence with the 100-day moving average.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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