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USD/JPY declines ahead of BOJ rate statement

H.S. Borji
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The US dollar declined further against the Japanese yen on Monday as investors weighed Friday’s uneven labour market report ahead of a highly anticipated rate statement from the Bank of Japan.

The USDJPY declined 0.61 percent to 109.10. The pair faces initial support at 108.76 and resistance at 110.34. The pair declined 0.8 percent last week after enjoying a period of sustained growth over the last three months that saw the dollar appreciate 7.4 percent against its Japanese counterpart.

The US dollar index, a broad performance measure of the greenback against a basket of currencies, declined sharply on Monday, falling 0.62 percent to 86.16.

On Friday the Labor Department said the US economy added 248,000 jobs in September, as the unemployment rate fell to 5.9 percent. However, average hourly earnings were unchanged in September. This prompted speculation the Federal Reserve could use weak earnings growth to justify keeping interest rates at a record low for a prolonged period.

The Bank of Japan kicked off its two-day meeting on Monday amid lingering doubts about the country’s inflation target. Policymakers are expected to maintain their highly accommodative stance toward monetary policy as the economy continues to struggle to reach its growth and inflation targets, suggesting the economy has yet to recover from the impact of the April tax hike.

A recent article published by The Wall Street Journal suggests the BOJ will likely adopt a more flexible timeline about when it expects inflation to reach its 2 percent target.

The BOJ announced in April of last year it expects to achieve 2 percent inflation in “about two years.” The central bank has remained committed to its target since announcing its unprecedented stimulus program, but has never spelled out an exact time frame for when it expects to reach the goal.

Meanwhile, economic data have been largely disappointing over the last two weeks, raising concerns about the country’s fragile recovery.

The Japanese economy contracted 7.1 percent annually in the second quarter. Industrial production unexpectedly declined 1.5 percent in August. Annual household spending declined for the fifth consecutive month in August, declining at an annual rate of 4.7 percent.
To-date, the BOJ has remained relatively upbeat about the recovery efforts, maintaining the country was progressing toward its growth and inflation targets. Japan’s unemployment rate stood at just 3.5 percent in August, down from 3.8 percent the previous month. An improving labour market, in the BOJ’s view, will boost income conditions and lead to higher consumption, which accounts for approximately 60 percent of the Japanese economy.

“With regard to the outlook, Japan’s economy is expected to continue its moderate recovery trend, and the effects of the subsequent decline in demand following the front-loaded increase prior to the consumption tax hike are expected to wane gradually,” the BOJ said in its September rate statement.

Japan’s Cabinet Office on Tuesday will release preliminary estimates of the coincident index and leading economic index for August. The coincident index provides a current snapshot of the Japanese economy, whereas the leading index provides an outlook over the short- and medium-terms.

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