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USD/JPY in Focus as Japan Slashes Growth Forecast

USD/JPY in Focus as Japan Slashes Growth Forecast

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On Monday, the USD/JPY pair reversed early losses after the Japanese government warned the world’s third-largest economy is slowing down.

Japan’s government said it now expects the economy to grow just 2.0% this fiscal year. This compares to its previous 5.5% projection. The announcement from the Cabinet Office, echoes the concerns of the Bank of Japan (BOJ).

Just last week, the BOJ downgraded growth projections to 2.4% from 2.9%. The BOJ’s bleak assessment will embolden Governor Haruhiko Kuroda, who advocates for a weaker Yen, in order to stimulate the economy.

Whilst many of the world’s central banks are tightening monetary policy to fight inflation, the BOJ is committed to its ultra-loose policy. Despite signs that inflation is creeping higher in Japan, interest-rates remain at -0.10% and are unlikely to move higher — for now at least.

On Monday July 25, the BOJ announced two less-dovish appointments to its policy board.

Only when the BOJ can normalize monetary policy and exit can it describe its massive monetary easing programme as a success,

BOJ Board member Naoki Tamara

The arrival of Hajime Tataka and Naoki Tamara could certainly ruffle the feathers of the doves. In the past Tataka has been a vocal advocate for paring back monetary stimulus. Similarly, Tamara said an exit from the current policy is a priority as soon as wages start to rise.

USD/JPY Outlook

Analysts at MUFG bank forecast the Yen could weaken to 1.4000 in the near-term. The bank cites the interest rate differential between Japan and the US as the key driver. But, they also predict the 1.4000 level may be the line in the sand for the BOJ.

We expect the possibility of government intervention in the forex market to stop the yen from weakening will come into view if the USD/JPY passes 140. The last time Japanese authorities conducted yen-buying intervention was in June 1998, when the USD/JPY was above 140.

Whether their forecast is proved right depends on how tomorrow’s FOMC meeting plays out. A 75-bp hike from the Fed is expected, and as such, is priced in to the USD/JPY rate. However, traders will focus on Fed Chair Powell’s presser for clues on future policy. A hawkish tone could spark a dollar rally, sending the Yen reeling towards 1.4000. By contrast, dovish rhetoric could be the catalyst for a long-await reversal in USD/JPY.

US Dollar to Yen Chart (Weekly)

Dollar Yen
Elliot Laybourne
Elliott is a former investment banker with a 20 year career in the city of London. During this time he held senior roles at ABN Amro, Societe Generale, Marex Financial and Natixis bank, specialising in commodity derivatives and options market-making. During this time, Elliott’s client list included Goldman Sachs, JP Morgan, Credit Suisse, Schroders Asset Management, and the Pennsylvania State Public School Employees Retirement System, amongst others. Today, he splits his time between Thailand and Dubai, from where he provides trading consultancy and business development services for family office and brokerage clientele.