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All eyes on Abe amid timid BoJ
The Bank of Japan (BoJ) expanded the annual ETF (exchange traded funds) buying programme from 3.3 trillion yen to 6 trillion yen, yet refrained from cutting the interest rates and inflating the size of its 80 trillion yen worth of bond-buying programme annually. The status quo in rates and the bond-buying programme caused some disappointment in the market. The USDJPY sold-off to 102.68, and a further decline towards the 100 level is well on the table. However, the upside risks prevail as the government is now expected to announce an impressive fiscal stimulus package to counter-balance the post-BoJ dissatisfaction across the market. The latest news suggested that the government is on a 28 trillion yen spending programme, including a sizeable 13 trillion yen worth of low-interest loans. Given that the inflation in Japan remains in negative territories, the market is expecting to see more action both in terms of monetary and fiscal sides, to bring the consumer price growth to the 2% mid-term target.

Nowadays, BoJ Governor Kuroda appears to be skeptical in senselessly topping up the central bank’s balance sheet – first because the efficiency of the monetary stimulus has been rather poor, and second, because the amount of bonds that are available for BoJ purchases is drying up at a dangerous speed. But on the other hand, PM Abe could not lead the Abenomics to failure, and therefore is expected to speed up spending on the alternative, fiscal channel – the so-called second arrow of Abenomics, and to concentrate on structural changes, the third arrow.

The fact is, the level of tension in the FX markets will be rising as the USDJPY approaches the psychological 100 level. From a trading perspective, the possibility of further stimulus could keep the USDJPY above the 100 level and bring in the dip-buyers for a potential recovery to the 105-108 level in the mid-term. It is worth keeping in mind that the market’s reaction to a potential break below the 100 level would be important. Should the USDJPY step below 100, then the yen may well be up for a further appreciation towards the 98/95 area.