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USD/JPY: The Bank of Japan cut its inflation forecasts on Wednesday but maintained its massive stimulus programme, with Governor Haruhiko Kuroda warning of growing risks to the economy from trade protectionism and faltering global demand.
Rising pressure from the trade war between China and the United States, Japan's biggest trading partners, is adding to strains on the world's third-largest economy and undermining years of efforts by policymakers to foster durable growth.
To be honest, if U.S.-China trade tensions are drawn out, there will be a serious risk to the global economy – first to the two countries’ own economies," Kuroda told a news conference after the end of the two-day policy review. "For now, that possibility is slim, and I hope they will resolve this soon.
As expected, the BOJ trimmed its inflation forecasts, reinforcing views that it will have to stick with its unprecedented economic support for some time to come. But despite rising risks such as trade disputes and Brexit, the central bank also maintained its view that Japan's economy will continue to expand at a modest pace. Kuroda struck an optimistic tone, saying the economy would likely continue expanding through fiscal 2020.
China on Monday reported its slowest growth in nearly three decades and it is expected to lose more steam in the coming months. The International Monetary Fund trimmed its global growth forecasts and a survey showed increasing pessimism among business chiefs amid the trade tensions. "Such downside risks concerning overseas economies are likely to be heightening recently, and it also is necessary to pay close attention to their impact on firms' and households' sentiment in Japan," the BOJ said in a quarterly outlook report released along with the policy decision. The BOJ reiterated a pledge to continue buying Japanese government bonds and left its short-term interest rate target unchanged at minus 0.1%. It also said it would keep guiding 10-year government bond yields around zero percent.
In its outlook report, the BOJ's nine-member board cut its economic growth projections for the current fiscal year to March but raised its growth forecasts slightly for the fiscal years 2019 and 2020, with government spending expected to offset the pain of a planned sales tax hike this October. The BOJ cut its forecast for core consumer inflation to 0.9% in the coming fiscal year from 1.4%, reflecting slumping oil prices. It was the fourth downward revision by the central bank to its inflation forecast for fiscal 2019 since it was first issued in April 2017. The central bank also trimmed core consumer inflation view for fiscal 2020 to 1.4%, from 1.5% forecast in October.
As part of efforts to prevent financial institutions from sitting on a huge pile of cash, the central bank decided to extend the deadline by one year for lending schemes aimed at encouraging financial institutions to boost loans and support growth foundations. The BOJ's radical stimulus programme has had some unintended consequences, as years of low rates hurt financial institutions' profits. The central bank has also amassed a mountain of Japanese government bonds and exchange-traded funds in its marathon asset-buying spree, risking distortions in financial markets. The bulls continue to tighten their grip on this market as there have now been 4 daily closes in a row above the 109.16 Fibonacci level, a 50% retrace of the 114.21 to 104.10 (November to January) fall. That has unmasked the 30-day MA at 110.04, a break and daily close above which will strengthen the bullish outlook. We keep our short unchanged below that barrier.
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