FX comment – Worries of Japan fiscal health and lower monetary stimulus bets – USD/JPY breaks 109

by: Roy Teo


JPY breaks 109 due to worries of Japan fiscal health and lower monetary easing expectations

The Japanese yen (JPY) broke below crucial support level 109 against the USD this morning after Bank of Japan (BoJ) member Sato doused market expectations that further monetary stimulus will be imminent. Mr Sato (who voted against negative interest rates and an expansion of QQE program) said that it is unnecessary to reach 2% inflation target at all costs. He is also doubtful that negative interest rates will stimulate capital spending and in fact could adverse effects such as affecting financial system stability and monetary tightening. He added that the current BoJ policy of expanding the monetary base and negative rates combination is not sustainable.  Separately, worries of Japan’s fiscal health after Prime Minister Abe delayed the planned sales tax hike scheduled for April 2017 have also increased. This is reflected in Japan’s rising credit default swap premium. As such, safe haven flows supported the JPY.

108 to hold ahead of US NFP

The strength in the JPY against the USD is not supported by interest rate differentials between the US and Japan which remain firm. Technical indicators in the hourly chart also suggest that the yen strength is in overbought territory. Having said that stop losses layered below spot price could push USD/JPY lower. Nevertheless, we expect 108 to hold ahead of US non-farm payrolls tomorrow. It is also worth noting that BoJ Sato dissent against negative interest rates is a minority among the BoJ members after fellow dissenters Ms Shirai and Mr Ishida have been replaced. We maintain our view that there is a case for further monetary stimulus later this year.