21.05.202021:09 Forex Analysis & Reviews: Bank of Japan emergency meeting: preview

The Bank of Japan will hold an emergency meeting tomorrow. As a rule, members of the Japanese regulator do not hold meetings in May - after the April meeting, there is a June meeting. But, to paraphrase a Latin expression, we can say that "desperate coronavirus times require desperate measures." Therefore, Harukiko Kuroda decided to convene the Board of Governors of the central bank a month ahead of schedule.

The official notice states that the BOJ will hold a policy meeting to "approve a new lending program to support businesses during the coronavirus crisis." A rather dry and uninformative wording, which, nevertheless, caused some excitement in the market - after a weekly flat within the range of 106.80–107.40, the price of USD/JPY jumped to the 108th figure, however, it could not gain a foothold there: the weakened dollar played a cruel joke with the buyers of the pair.

At the same time, contrary to many dollar pairs, USD/JPY did not follow the general trend and maintained its positions near the boundaries of the current price level. It is also worth noting that the 10.10 mark corresponds to the upper border of the Kumo cloud and at the same time to the upper line of the Bollinger Bands indicator on the daily chart. Therefore, if traders can gain a foothold above this target, the Ichimoku indicator will form one of its strongest signals, the Parade of Lines, and the bulls will have access to the next resistance level of 109.10 (the upper limit of the Kumo cloud is already on the weekly chart). This scenario is very likely, especially if Kuroda surprises the market with his ultra-soft decisions at tomorrow's meeting.

The formal reason for the emergency meeting was the release of data on the growth of the Japanese economy. Japan's GDP index suddenly fell by 3.4% in the first quarter. The key indicator has been declining for two consecutive quarters, so from a technical point of view, we can say that the Japanese economy has plunged into recession. And although the indicator came out slightly better than the forecasts (most experts predicted a decline to 4.6%), in fact, this fact did not change anything. On a quarterly basis, GDP slowed by 0.9% (against the consensus forecast of -1.2%). But the figure for the fourth quarter was revised downward to -7.3%. The structure of the release indicates a reduction in personal consumption (in quarterly terms, the indicator decreased by 0.7%), capital expenditures (a decline of 0.5%) and export volumes (by 0.6%).

It is worth noting that this is the first recession in the last five years, and the country's economy was not affected by the coronavirus crisis in the fourth quarter of last year, since the COVID-19 virus appeared only in November-December 2019. Part of the economic downturn is due to tax policy. After the sales tax was raised in Japan, consumer spending collapsed by three percent at once. Business investment also declined significantly. Similarly, exports showed weak dynamics. The coronavirus factor joined all the economic problems in the first quarter of 2020. Therefore, according to the overwhelming majority of experts, the Japanese economy will show negative dynamics in the period of April-June, indicating the reality of a recession.

The BOJ could not ignore such disappointing statistics. The downward trend has become stable, so the regulator is likely to move from words to deeds tomorrow. Last week, Harukiko Kuroda warned that the central bank "will not hesitate to ease monetary policy again if circumstances require it." He clarified that the regulator may expand the asset purchase program or lower rates. At the same time, he admitted that the Japanese economy "for some time" will remain in a difficult state.

According to many experts, the BOJ will expand QE at the meeting, but will leave interest rates unchanged. But in my opinion, the risk of lower rates is quite high. It is worth recalling that back in July 2018, the Japanese regulator expanded the range, or rather, the limits of long-term interest rates - this allows the regulator to go deeper into the negative area at any meeting. However, the central bank does have other additional levers of influence in its arsenal.

Thus, if the Japanese regulator confines itself to QE expansion tomorrow, the yen may demonstrate short-term weakness, and the pair will temporarily jump to the middle of the 108th figure. But if Kuroda still decides to lower rates, then the pair's growth will take a protracted character. In this case, the yen will weaken to the level of 109.10 (the upper border of the Kumo cloud is already on the weekly chart), indicating a new price horizon in the form of the 110th figure.