New BoJ Stimulus Unlikely with Core Inflation Over Target Rate; USDJPY Downtrend

by on May 30, 2014 12:28 pm BST

Even as data showing consumer consumption in Japan post-tax hike in April and preliminary industrial production declining quickly, the likelihood of continued stimulus from the Bank of Japan (BoJ) is growing unlikely. Inflation data indicated that core inflation year-over-year jumped from 1.3 percent in March to 3.2 percent in April, well above the central bank’s two percent target.

The BoJ has been quietly looking for a means to an end of the massive quantitative program that was implemented last year to boost economic expansion and inflation. With inflation well above the two percent target, the central bank could begin to taper their asset program while trying to manage higher inflation. Inflation over the short-term will not be as detrimental as if it was extended over a period of time. The BoJ Deputy Governor Kikuo Iwata said, recently, “the BoJ’s current policy intends to prevent not just deflation but inflation from well exceeding two percent, such as four or five percent for a medium- to long-term period.” It’s currently well above two percent.

USDJPY has been ranged bound while staying within the current downtrend. The yen has seen demand, and the off-and-on demand in the dollar is keeping the pair in consolidation.

Support is currently holding at 101.60/65, but continued yen strength on a dampening outlook for continued stimulus should cause the dollar-yen to break through support level 101.14 before challenging 101.

Upside is likely to be contained to the current downtrend at 101.85, while price resistance remains at 102.10.

1D Chart of USDJPY

1D Chart of USDJPY