Concerns Over Japanese Economy

Concerns over the health of the Japanese economy continue to grow as the country steps up its battle against the ongoing COVID pandemic. The Japanese government has recently had to reinstate a State of Emergency in some regions, including Tokyo and Osaka as the second wave of the pandemic continue to intensify. It has now been reported this week that the country is highly likely to extend the emergency conditions in response to persistently high infection rates and death toll.

BOJ Ready to Ease Further

The December BOJ meeting minutes released this week showed that the boj remains highly concerned over the path of the virus and is struggling with a great deal of uncertainty in its forecasting. Interestingly, the BOJ also commented on the continued weakening of USD against the Yen, which has seen increased safe haven inflow over recent months, as well as benefiting from USD weakness.

Looking ahead, the BOJ agreed that the bank should ease as necessary in order to backstop the economy. However, members also agreed that the bank should carefully analyse its options with a view to ensuring that its methods support the goal of achieving the bank's inflation target. With this in mind, several of the bank's members said that the bank needs to make its ETF purchases more flexible while ultra-loose monetary policy remains in place for longer. Another interesting conversation was held around the suggestion that the bank should boost profit for small and medium sized companies via digitalisation as a way of enhancing the company's growth potential.

BOJ Governor Defends Bank's Strategy

Speaking on Tuesday, BOJ governor Haruhiko Kuroda said that the fiscal health of Japan is in "very serious" condition as a result of massive fiscal stimulus announced in response to the pandemic. However, Kuroda noted that the BOJ is not funding the government via its bond purchases. The BOJ chief rarely comments on fiscal matters but, during a parliamentary committee session, told lawmakers: "I personally think Japan's fiscal situation is very serious,"I personally think Japan's fiscal situation is very serious,"

Japan Steps Up Fiscal Stimulus

The Japanese government plans to issue debt of 23601. trillion JPY starting in fiscal year 2021 (April), an increase of 82.55 trillion JPY from the current year as per the plans laid out by the finance ministry in December. However, Kuroda was keen to clarify that the BOJ's bond purchases were not a means of financing the government but part of its attempts to return inflation to 2%.

Technical Views

USDJPY

USDJPY has been trending lower within a broad bearish channel for several months now. The decline has seen the pair breaking through several key levels. However, the 103.92 level looks to be holding as decent support with price having tested the level three times now since November. While price is currently capped by the channel high, the bullish divergence in momentum studies flags the risk of a reversal higher. Should price clear the 104.63 level, bulls will look to challenge the 106 handle next.

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