USD/JPY: Yen Vulnerable as Bank of Japan in Focus

Despite holding its ground yesterday, the Japanese yen is foreseen to resume its decline in the coming hours as the Bank of Japan is expected to unveil its most determined effort yet to overcome years of economic stagnation and deflation at the conclusion of its policy meeting today. Meanwhile, the appeal of the US dollar is seen to rise in anticipation of the Existing Home Sales report which is believed to further underscore the improving US housing market.

Amid intense pressure from the Japanese government, the markets are widely expecting the Bank of Japan to inflate its 101 Trillion Yen asset-buying program in what would be the first time in nearly a decade that the central bank has expanded monetary policy in two consecutive meetings. An expansion of the program would also be its fourth major move since September in its efforts to boost the sluggish economy. More importantly, the central bank is also awaited to formally adopt a 2 percent inflation target likely to be presented as a joint government and BOJ decision on policy coordination. Sources say that after setting a clear inflation target, the BOJ will pledge to proceed with its monetary easing policy while the government will work on boosting economic growth potential and achieving fiscal health. While no deadline is expected to be set, the bank aims to achieve the target in the “medium term,” sources added.

Japan’s new government, led by Shinzo Abe, swept into power last month on a commitment to fix the economy with big spending and pressure the BOJ to aggressive measures to jumpstart the world’s third-largest economy. The nation has been beset by deflation since the 1990’s, continuing to hurt the economy as falling prices cut into corporate profits, leading firms to cut jobs and delay growth-generating capital investment. Demand is also affected as it encourages consumer to delay purchases in the hope of paying less later. With the BOJ anticipated to announce more aggressive measures in its press conference later, the Yen is deemed for declines.

Over to the US, signs of life in the housing market continue to roll in as economists expect that existing home sales incline to their highest levels since March 2011. Historically low mortgage rates, an improving jobs market and an increasing number of households likely helped incite housing demand. Considering these, a long position is recommended for the USD/JPY trades today.

Aviv N. Shapiro is a Senior Research Analyst and Business Development Officer for AlgosysFx.