BoJ remain upbeat on economy yet slightly lower CPI forecast


The biggest take from the outlook report and policy statement is there is unlikely to be a need for tightening any time soon. Nikkei appears set to retest the highs yet price action on USDJPY suggests it may be a fruitless attempt.

  • BoJ provided a more upbeat view of the economy from prior meeting
  • Policy remains unchanged
  • Fiscal year price forecast reduced slightly

Today’s meeting saw the BoJ upgrade their view of the underlying economy further from the prior meeting, although there were no signs of tightening policy any time soon. With growth expected to continue expanding at a pace ‘above potential’ in 2018, a mild slowdown is expected the following year due to the ‘cyclical slowdown in business fixed investment and the effects of the scheduled consumption tax rate’.It is a busy week of data for Japan and

It is a busy week of data for Japan and focus now shifts to tomorrow’s data dump, which includes inflation, employment, industrial and consumer spending.

Household spending remains the Achilles heel for Japan’s economy. Contracting at -3.8% YoY they’re unlikely to welcome higher prices if inflation does pick up, which results in inflation remaining capped.

Japan’s all industry index continues to move higher and broke to its’ highest level since the GFC (blue line). The Reuters Tankan index shares a decent correlation with the broad industry index, which suggests we could indeed see higher output from Japan and for growth to remain supported.

We analysed the Nikkei last week alongside JPY crosses and US stocks to identify an improvement in risk appetite to move higher. The Nikkei has followed the signal well whilst JPY sold off against its peers. Yet from here we remain on the sidelines and await a more favourable price before considering a break higher. Yesterday’s shooting star warns of near-term weakness whilst we meander around the monthly pivot. As we are so close to the prior highs, we think there is potential for a retracement and an ideal area to assess for future basing patterns is around the gap (which has not yet been closed). As the 50 and 200 eMA’s have curled up we think it will finally break the highs, yet seek a lower price to get on board the anticipated break out. If we are instead to see direct gains then we would prefer to wait for the break and assess potential for retracement of the break levels, before reconsidering long positions.

What may be holding back direct gains for Nikkei is how USDJPY remains relatively subdued following Trump’s tax plans. We would expect to see the gap between Nikkei and USDJPY close, but it is a 50/50 as to whether we’ll see Nikkei move lower or USDJPY move higher. Either way, we would want both markets to move in tandem when it decides its direction, otherwise, we would be dubious of either market breaking key levels.

Additionally, we note USDJPY is fast approaching resistance around the 112/112.20 area. We doubt it will break upon the first attempt and already we see the bearish engulfing candle on H4 warns of weakness to the narrow bullish channel. A break of the channel could be seen a near-term bearish signal to trade shot on lower timeframes, although 110.50 and the gap are areas which may provide support. Until we see a break of 112.50 on USDJPY then we doubt Nikkei’s ability to break its own highs.

Matt Simpson | Senior Market Analyst


A certified technical analyst, combining macro themes, monetary policy and business cycles to generate Forex and commodity trade ideas.

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BoJ remain upbeat on economy yet slightly lower CPI forecast

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