Bank of Japan Underscores Risks to Economic Outlook

In a widely-anticipated move, the Bank of Japan opted to leave interest rates on hold and quantitative easing unchanged during its latest decision announced overnight. Although the Central Bank highlighted a moderate recovery in the language of its statement, the balance of risks to the outlooks remains skewed to the downside, per policymakers. As a result, there is the growing possibility that the Bank of Japan may implement more aggressive measures in the coming periods if data like inflation and growth fail to meet officials’ ambitious targets.

However, even with the more accommodative stance struck by the Central Bank, there are many developments that could negatively impact the economy on the whole. For one, the BoJ is closely watching the impact of rate hikes for the United States to see how it affects the dynamic in emerging markets considering its importance for Japanese exports. Furthermore, heightened rhetoric on trade barriers and a growing possibility of economic protectionism may very well erode Japan’s export competitiveness, creating new headwinds for policymakers as they work to reach the inflation goal and restore growth.

Improving Fundamentals Contrast with Dovish BoJ

Despite the multitudinous risks facing the Japanese economy, there has been a sense of steady improvement over the last several months. The strongest evidence of these gains came in the form of accelerated annualized GDP growth and climbing inflation. GDP growth for the fourth quarter was revised higher to 0.30% from the preliminary estimate of 0.20%, while annualized growth picked up to 1.20% compared to the advanced reading of 1.00%. Although growth was more tepid than prior quarters in 2016, the figures nevertheless gave a sense of progress, especially when taking into account growing exports and imports during the period as trade ballooned.

The growth in trade was a likely contributor to the recently witnessed upside in inflation. Data for January showed that core inflation, which strips away more volatile components of the headline figure, rose to 0.10%, marking the first positive print since December of 2015. Although additional progress will be necessarily to meet the BoJ’s target, this data does highlight a gradual improvement in consumer prices. While Governor Haruhiko Kuroda was quick to highlight the Central Bank’s ability to lower interest rates further into negative territory, he believes that inflation will gradually reach the target, lessening the likelihood of more extreme action on rates.

However, Japanese policy has not been without criticism, as evidenced by charges of anticompetitive behavior leveled by US officials. Moves vis-à-vis monetary policy to keep the Yen cheap relative to peers has drawn stern condemnation from the US Administration as it seeks to reverse the longstanding trade imbalance. Nevertheless, considering the strategic importance of US-Japanese relations, especially on the backdrop of growing geopolitical tension in the region, this is unlikely to result in a major trade spat between the two nations. If anything, moves by the US Federal Reserve to tighten policy will help the Bank of Japan to achieve their goals while enabling the gradual removal of highly accommodative measures.

Nikkei 225 Climbs as Accommodation Set to Remain

With the Bank of Japan not intending to remove record stimulus any time soon, the Nikkei 225 has continued to gain ground, trending back towards record highs reached back in 2015. As one of the leading indicators of economic activity and health, the equity benchmark’s climb does add to the sense of optimism prevailing amongst market participants. One of the key factors to watch though is how the Yen trends over time. Considering the correlation coefficient between USDJPY and the Nikkei 225 currently stands at 0.7295, the relationship between the two assets remains strong, meaning that a rise in USDJPY will likely be accompanied by a rally in the Nikkei.

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Besides the correlation coefficient, the emergence of an ascending triangle pattern is particularly bullish for the outlook. The consolidation is being formed by an upward trend beginning near the end of 2016 combined with resistance at 19700. Any candlestick close above resistance would be indicative of a triangle-based breakout to the upside, especially if accompanied by higher momentum and trading volumes. Adding to the upside bias are the 50 and 200-day moving averages which are acting as support. The next target on the upside should resistance be crossed sits at 20035. On the downside, support at 18975 is the level to keep an eye on should the Nikkei 225 fail to break higher.

What Binary Options Traders Should Watch For

Even with the major announcements behind the Nikkei 225 for the time being, there are some upcoming events of note. For one, trade data is set for release in the middle of next week, with figures pertaining to exports and imports to be delivered. A pickup in trade will be generally positive for the economy and inflation overall, helping to reduce the downside risks to a degree. The biggest downside risk for the outlook on both a growth and inflationary level would be the implementation of trade barriers by the United States. This could temporarily add to downward pressure on the Nikkei equity index, however, if the Bank of Japan rides to the rescue with more stimulus or lower interest rates, the Nikkei 225 may be poised to retest the 2015 over the coming months.