USDJPY Unimpressed By New Fiscal Stimulus

After spending weeks building up the anticipation, Japanese Prime Minister Shinzo Abe announced a brand new fiscal stimulus package Wednesday morning, exceeding even the most optimistic of estimates. Abe blew away expectations,revealing a JPY 28 trillion ($266 billion) set of measures intended to complement accommodative monetary policy measures currently being undertaken. However, in spite of the optimism surrounding the proclamation, the USDJPY pair continues to fall as the Yen strengthens amid concerns about the government’s ability to tackle low wage growth and overcome deflation. As the Bank of Japan enters the second session of its two-day monetary policy meeting, markets are impatiently awaiting a decision to expand quantitative easing or drop interest rates further negative territory, adding to the volatility in the USDJPY as the answer approaches.

Short-Lived Optimism

Based on the current price action of the USDJPY pair and the recent Yen strengthening even after the government unveiled its most ambitious set of fiscal stimulus measures to date, markets are not placing a lot of optimism in the Bank of Japan’s upcoming monetary policy announcement. While the reaction in Asian stocks was palpable, even the Nikkei 225 reflected a sense of disappointment, falling -1.13% on the session to 16,476.84 as the Yen rose. A disappointment from the Bank of Japan could send the USDJPY pair plunging back towards the 100.00 psychological level once more. Based on the existing economic trajectory of Japan and global deflationary environment, BoJ officials are faced with a stark reality. The two options they have are to either choose to expand quantitative easing and lower interest rates or do nothing.

While obviously it is easier for the Central Bank to refrain from making any adjustments to policy, the drawback is a Yen that will conceivably strengthen further, similar to earlier monetary policy decisions in which the Bank held back from expanding accommodation. However, while this might appear to be the worse of the two options, there are certain untold benefits to this path. For one, it has been widely asserted that quantitative easing and accommodation only works when one country is opting for the strategy. In an environment where nearly all advanced economies are accommodating policy, it creates the sense of a race to the bottom, reducing the efficacy of these activities. Even though there will be pain felt by exporters as they see their competitive edge eroded by a stronger Yen and the possibility of further deflation and weaker wage growth, additional action may not be able to overcome these factors.

One of the untold dangers behind implementing more extreme accommodation is that it may experience a failure to launch. Considering the ongoing deflationary environment, expanded monetary stimulus may be the equivalent of spitting into the wind for BoJ Governor Haruhiko Kuroda. Considering the forces acting negatively on the Japanese economy, a local fix may not be enough to offset a problem that is global in scale. Notwithstanding the fact that it may have limited worth, another bout of global uncertainty that forces an unwinding of the Yen carry-trade could further reduce the effectiveness of any new monetary stimulus. While Kuroda may have some breathing room if the US Federal Reserve acts to normalize monetary policy, no such action is expected imminently despite the more hawkish stance of the latest FOMC Statement.

Technically Speaking

After reaching multi-year highs back in 2015, the USDJPY pair has spent the entirety of 2016 in a downward trend. The bearish bias is clearly underlined by the equidistant channel formation that first emerged back in February. Ideally, positions established at or near the upper channel should target the lower channel line for an exit. However, should the USDJPY pair manage to experience a candlestick close above the upper channel line, it could be an early sign of a channel-based breakout higher and trend reversal. Nevertheless, if the channel remains intact, so does the bearish bias, helped in part by the moving averages trending lower above the price action. While the 50-day moving average is acting as initial resistance, the 200-day moving average might also prevent any sustained rebound. On the downside, a break below 100.00 paves the way for significant further losses in USDJPY.

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More of the Same

Whether or not the Bank of Japan opts to adjust monetary policy in the coming session, USDJPY will likely continued to be overshadowed by developments in the global economy, especially with the pair remaining a strong barometer of risk sentiment. Deteriorating fundamentals and the deflationary environment will continue to weigh on the USDJPY pair, with the Yen strengthening in the absence of a willingness to take risk. Even if the BoJ does act, it may be for not, especially if they are unable to overcome headwinds that span the world. Although the Federal Reserve may alleviate some of the pressure down the road, the immediate risks for USDJPY remain to the downside without another installment of new record-breaking monetary policy measures.