Breakdown of the latest developments on the global exchanges
Oct 29, 2020, 8:52 AM GMT

No Surprises in Japan, BOJ Eyes Moderate Recovery Ahead

Tokyo, Japan cityscape in the Marunouchi District and Tokyo Station.

In the second crucially important interest rate decision of a major central bank this week, the Bank of Japan quite expectedly decided to maintain is negative Policy Rate unchanged at -0.10 per cent.

The Policy Board Members of the BOJ outlined their recalibrated economic projections, which entail a general recovery at a moderate pace through 2022 as the impact of the coronavirus crisis wanes.

"Japan's economy is likely to follow an improving trend with economic activity resuming and the impact of the novel coronavirus (COVID-19) waning gradually, but the pace is expected to be only moderate while vigilance against COVID-19 continues. Thereafter, as the impact subsides globally, the economy is projected to keep improving further with overseas economies returning to a steady growth path."

The Bank, however, wearily acknowledged that its projections are based on a broad scenario underpinned by a lot of uncertainties. Chiefly, that:

"The outlook is based on the assumption that COVID-19 will not spread again on such a large scale that the wide-ranging public health measures will need to be reinstated."

The general experience from recent developments in Europe and the US run contrary to such expectations, as the pandemic continues to deepen in the Northern hemisphere.

Meanwhile, subdued inflationary pressures in Japan could further stave off the road to recovery, as aggregate demand remains weak. As can be seen from the graph below, headline inflation was recorded at 0.0 per cent in September.

Japan Inflation Rate

The general price stability could remain jolted over the next several weeks, given the underlying tribulations in the energy market. Falling oil prices would dampen aggregate demand, particularly as parts of the world consider going into lockdown once again.

The 4H price chart below underpins these developments' adverse impact on the USDJPY, as investors scramble for safe-havens such as the yen. As can be seen, the pair is establishing a new downtrend.

The price action is currently drawing near to the psychologically significant support level at 104.000, which has already served as a prominent turning point on at least three occasions in the past.

The emerging downtrend, being outlined by the descending channel, is taking the form of a 1-5 impulse wave pattern, as postulated by the Elliott Wave Theory. Evidently, the price action is currently developing the final impulse leg (4-5), which could test the strength of the aforementioned support level.

Meanwhile, the descending order of the three moving averages – the 100-day MA (in blue), the 50-day MA (in green), and the 20-day MA (in red) – illustrates the strong bearish bias in the market.

USDJPY 4H Price Chart