BOJ Ramps Up Purchases, Warns Of Second Wave Risks

<p>The Bank of Japan this week reiterated its view that the Japanese economy, the third largest globally, is on course to gradually recover from the COVID-19 pandemic. In a bid to further support the recovery, the BOJ announced that it will be extending its corporate funding support from $700 billion (which the bank announced last month) to $1 trillion.</p>
<h2>Second Wave Risks Create Uncertainty</h2>
<p>While BOJ governor Kuroda was keen to highlight that the bank feels that the current measures have been effective and provide enough support at this point, there are still risks ahead. In comments made during the post-meeting press conference, Kuroda warned: “We can’t rule out the risk of a second wave of infections.” Kuroda went onto explain that the questions over the path of the pandemic mean that the outlook is highly uncertain and the subject to change. At any rate, the BOJ expects the impact of the crisis to have long lasting implications for the economy meaning that rates are likely to remain at low levels for an extended period of time. On this matter, Kuroda said: “Whether it’s the fiscal year 2021 or 2022, I do feel we’re a long way from a situation where we can raise rates.”</p>
<h2>Kuroda Warns Rates To Stay Low</h2>
<p>These comments from Kuroda come just a week after Fed chairman Powell warned that rates in the US were unlikely to lift before 2022 and suggest that the BOJ is likely to map that trajectory, with Kuroda’s term as BOJ governor due to end in 2023. The situation could become even more complicated for the BOJ if the Fed, in line with market expectations, moves to a yield curve control approach which the BOJ has been employing since 2016. Such a move by the Fed would likely result in a much narrower gap between US and Japanese rates making it difficult for the yen to weaken further and diluting the return to 2% inflation in Japan.</p>
<p>The big question now is over the BOJ’s future response, given the uncertain outlook, and the prospect of the bank adopting a new approach. Kuroda said following the meeting that “Given uncertainty on how the pandemic could affect our economy and markets, we may need to ponder new measures. We’ll respond flexibly.”</p>
<p>In response to the meeting, Japanese equities markets moved higher, shrugging off rising global concerns over a potential second wave of the virus, while the Yen weakened mildly. With the Fed announcing the start of its corporate purchases program this week and amidst reports that Trump is pondering a huge new infrastructure program, the main moves have been confined to the equities market.</p>
<h2>Technical Views</h2>
<p><strong>GBPJPY (Bullish above 133.65)<br />
</strong></p>
<p>From a technical viewpoint. GBPJPY continues to consolidate mid channel, supported by VWAP and the 133.65 level. While this holds, near term bias remains bullish with focus on a further push higher within the bullish channel to retest the 139.75 yearly pivot.</p>
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