New Lending Facility

The Bank of Japan announced further measures this week in its fight against deflation in the country. Following in the footsteps of the Fed, at the emergency meeting held over-night, the BOJ announced a new program aimed at boosting lending for small businesses. Along with the new measures the BOJ also announced a six-month extension to the deadline for its previously announced measures. These decisions come on the back of recent inflation data which showed Japan heading back into deflationary territory for the first time since 2017.

Under the new program, the BOJ hopes to channel up to $280 billion into struggling small businesses. along with previously announced measures, the BOJ now plans to pump just shy of $700 billion into the Japanese economy as it continues its fight against COVID-19.

The need for action is incredibly urgent. In Q1, Japan fell back into recession for the first time in five years as the disruption caused by the COVID-19 measures caused a dramatic drop in activity. While these measures are starting to ease now, there is a very real fear that Q2 data will be just as weak, confirming a technical recession in the country.

Government Guearantees For Banks

In a bid to increase liquidity in the economy the BOJ has said that it will pay commercial banks a 0.1% interest rate to banks which use the lending facility for loans starting from June. As with the Fed’s program, the BOJ is using government guarantees to backstop commercial banks in the event that any of their debtors default meaning that not only will commercial banks now be paid or lending money, they will also have their credit risk waived.

The BOJ is next scheduled to meet in just over two weeks for its June monetary policy meeting. In light of the announcements made over the last two months and with rates already well into negative territory, no further action is expected from the bank. However, traders will be keen to see how much uptake there has been on its new program and how effective the measures have been.

Technical Views

USDJPY (Bearish Below 108.50)

From a technical viewpoint. USDJPY continues to consolidate below the 108 level, after running into selling pressure at the monthly R1. With VWAP negative, a further break lower is still seen with the 106 level the main downside marker to watch. To the topside, bulls will need to see a break of the monthly pivot (108.50) to negate near term bearishness.

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