BoJ Meeting: Status Quo Likely, Watch Out For A Trendline Break On USD/JPY

Bank of Japan (BOJ) monetary policy decision due on Tuesday will be accompanied by an updated economic assessment report.

BOJ to stand pat

The BOJ is likely to keep its rates and QQE with yield curve control policy unchanged in line with consensus expectations.

Downward revision of inflation forecasts likely

Analysts at Nomura say the BOJ’s inflation forecast downgrade is inevitable.

A significant minority expects the central bank to revise inflation forecasts lower. The central bank continues to struggle to spur inflation above 0.5 percent and has repeatedly cut its price forecast, even though the unemployment rate is at a 20-year low.

One may argue that inflation has increased throughout 2017, but has been a product of rising fuel prices. As analysts at Danske Bank write, "the underlying price pressure in Japan remains very low, despite solid growth and a closed and increasing output gap, and the BoJ’s 2 percent inflation target is currently nowhere within reach.”

Abenomics prevailed, doors open for more stimulus

Abe's landslide victory in the snap elections has left the doors wide open for more stimulus, if required. Currently, doves are in control at the BOJ. Furthermore, reports are doing the rounds that the BOJ sees merit in boosting aggregate demand via easy monetary policy ahead of the planned sales tax hike in 2019.

To cut the long story short-

• The BOJ is likely to remain as a 'lone dove' well beyond 2018.
• The downward revision of the inflation forecasts won't be a surprise.
• The persistently accommodative policy will ensure the Yen remains a sitting duck (favored funding currency).

Overall, the policy event is likely to have a minimal impact on the USD/JPY pair. If anything, the downward revision of the inflation forecasts could only end up weakening the Yen.

USD/JPY Technicals

Monthly chart

The above chart shows-

• Positive follow through to last month's bullish engulfing candle, however...the spot is stuck at the resistance offered by the two-year-long falling trendline
• The RSI is above 50.00
• Bullish DMI crossover

Tomorrow's end of the day close (also Oct close) above the trend line hurdle would add credence to the higher lows pattern and shall open doors for a rally to 118.66 (Dec. 2016 high). A violation there would expose the inverse head and shoulder neckline hurdle of 126.40.

On the downside, only a monthly close below 111.27 (upward sloping 50-day MA) would abort the bullish view, while a break below the rising trend line sloping upwards from 2012 low would confirm a bullish-to-bearish trend change.

View

• The odds of a bullish break are high as discussed here
• The yen could be offered across the board if the BOJ talks about the need to do more (easing) in order to counter the impact of scheduled sales tax hike in 2019.