The Japanese yen gained against the USD after the bank of Japan (BOJ) delivered its fourth interest rates decision of the year. As expected, the bank left interest rates unchanged at the current level of minus 0.1%. The committee also committed itself to stimulus into 2020 to address the ongoing slow growth and inflation.
On interest rates, the committee committed itself to leaving rates unchanged at least around spring of 2020. This was viewed positively by the market because the bank had not specified when it would tweak interest rates in the past statements.
On the closely-watched quantitative easing, the committee said that it will continue buying the Japanese Government Bonds (JGBs) so that the yield on the ten-year note remains around zero percent. In addition, the bank announced that it was relaxing the eligibility standards for credit provision to companies, which was viewed as a measure to boost growth.
Investors believe that the new measures will stir growth in an economy that is facing multiple challenges. As an export-driven economy, the country has suffered with the current situation of trade conflicts. In fact, data released this month showed that the exports declined for the fourth consecutive month. This led to an increase in the country’s deficit.
In addition, consumer sentiment declined to the lowest level in three years. This dashed hopes for any wage growth. Further, the country’s inflation rate has continued to remain below the BOJ target of 2%. As I have explained before, strong employment numbers in Japan don’t necessarily lead to higher inflation as is common with other countries. This is because of the country’s aging population, which is not concerned much about consumption. In fact, the bank said that inflation will average between 1.1% and 1.5% in 2020. The statement said:
The Bank will continue with “Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control,” aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will continue expanding then monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds 2 percent and stays above the target in a stable manner.
In response to the interest rates decision, the USD/JPY pair declined to a low of 111.85. This level was along the 21-day and 42-day moving averages. The MACD has started moving downwards. There is a likelihood that the pair might resume the upward trend because of the strength of the US economy.