USD/JPY

The Bank of Japan cut its inflation forecasts on Wednesday but maintained its massive stimulus programme, with Governor Haruhiko Kuroda warning of growing risks to the economy from trade protectionism and faltering global demand.

Rising pressure from the trade war between China and the United States, Japan's biggest trading partners, is adding to strains on the world's third-largest economy and undermining years of efforts by policymakers to foster durable growth.

"To be honest, if U.S.-China trade tensions are drawn out, there will be a serious risk to the global economy – first to the two countries’ own economies," Kuroda told a news conference after the end of the two-day policy review. "For now, that possibility is slim, and I hope they will resolve this soon."

As expected, the BOJ trimmed its inflation forecasts, reinforcing views that it will have to stick with its unprecedented economic support for some time to come.

But despite rising risks such as trade disputes and Brexit, the central bank also maintained its view that Japan's economy will continue to expand at a modest pace.

Kuroda struck an optimistic tone, saying the economy would likely continue expanding through fiscal 2020.

China on Monday reported its slowest growth in nearly three decades and it is expected to lose more steam in coming months. The International Monetary Fund trimmed its global growth forecasts and a survey showed increasing pessimism among business chiefs amid the trade tensions.

"Such downside risks concerning overseas economies are likely to be heightening recently, and it also is necessary to pay close attention to their impact on firms' and households' sentiment in Japan," the BOJ said in a quarterly outlook report released along with the policy decision.

The BOJ reiterated a pledge to continue buying Japanese government bonds and left its short-term interest rate target unchanged at minus 0.1%. It also said it would keep guiding 10-year government bond yields around zero percent.

In its outlook report, the BOJ's nine-member board cut its economic growth projections for the current fiscal year to March but raised its growth forecasts slightly for the fiscal years 2019 and 2020, with government spending expected to offset the pain of a planned sales tax hike this October.

The BOJ cut its forecast for core consumer inflation to 0.9% in the coming fiscal year from 1.4%, reflecting slumping oil prices. It was the fourth downward revision by the central bank to its inflation forecast for fiscal 2019 since it was first issued in April 2017.

The central bank also trimmed core consumer inflation view for fiscal 2020 to 1.4%, from 1.5% forecast in October.

As part of efforts to prevent financial institutions from sitting on a huge pile of cash, the central bank decided to extend the deadline by one year for lending schemes aimed at encouraging financial institutions to boost loans and support growth foundations .

The BOJ's radical stimulus programme has had some unintended consequences, as years of low rates hurt financial institutions' profits.

The central bank has also amassed a mountain of Japanese government bonds and exchange-traded funds in its marathon asset buying spree, risking distortions in financial markets.

The USD/JPY bulls continue to tighten their grip on this market as there have now been 4 daily closes in a row above the 109.16 Fibonacci level, a 50% retrace of the 114.21 to 104.10 (November to January) fall. That has unmasked the 30-day MA at 110.04, a break and daily close above which will strengthen the bullish outlook. We keep our short unchanged below that barrier.

Japan's annual core consumer inflation slowed to a seven-month low in December as soft household spending kept firms from raising prices, a further sign of the growing challenge faced by the central bank in achieving its elusive 2% target.

The data comes ahead of the Bank of Japan's rate review next week, where the nine-member board is seen cutting its price forecasts and warning of heightening global uncertainties.

The core consumer price index, which includes oil products but excludes volatile fresh food costs, rose 0.7% in December from a year earlier, government data showed on Friday, slowing from the previous month's 0.9% gain.

It fell short of a median market forecast for a 0.8% gain and was the slowest pace of increase in seven months.

The data underscores the fragile nature of Japan's economic recovery, as escalating Sino-U.S. trade frictions and slowing Chinese growth weigh on exports and business sentiment.

Core consumer inflation may grind to a halt in coming months as recent oil price falls push down gas and electricity bills, which could put the BOJ under pressure to ramp up an already massive stimulus programme.

Recent falls in crude oil prices were already pushing down gasoline costs, and will likely lead to declines in electricity and gas bills from around March or April, said a government official briefing reporters on the data.

BOJ officials have said they will look through the effect of temporary factors like oil price moves and focus on how the underlying strength of the economy affects prices.

But the central bank may find it difficult to justify its view a continued economic recovery will gradually push up inflation, as fears of slowing global demand could discourage firms from boosting wages and giving consumers more disposable income.

An index the BOJ focuses on - the so-called core-core CPI that strips away the effect of both volatile food and energy costs - rose just 0.3% in December, flat from the previous month's pace.

Stubbornly low inflation has forced the BOJ to maintain a radical stimulus programme despite the rising costs, such as the hit to financial institutions' profits from years of low rates.

Japan's economy shrank in the third quarter of last year and some analysts suspect that any rebound in October-December may have been weaker than initially expected, as trade protectionism and slowing global demand hurt business sentiment.

The USD/JPY has registered a daily close above the major 109.16 Fibo, a 50% retrace of the 114.21 to 104.10 (November to January) drop, which has in turn unmasked the falling 30-day MA which is currently at 110.41.

The yen surged on Thursday as investors scrambled into the perceived safety of the Japanese currency after a shock revenue warning from Apple exacerbated concerns about a Chinese and broader global economic slowdown.

The yen at one point was 4.4% stronger versus the dollar after a flurry of automated orders triggered a 'flash crash' in thin Asian markets. It later stabilised but the yen remains on course for its biggest one-day rise in 20 months.

Such big moves in foreign exchange markets reflect deep and growing angst about the global economy - the yen has traditionally been the go-to currency in times of stress because traders believe the legions of Japanese investors holding money overseas will rush back into Japan when markets are in flux.

The yen, up 5.3% in five weeks, is the best performing major currency since early December, when worries about the direction of the global economy intensified.

Weakness in the dollar also reflects concerns about the U.S. economy and a drastic shift in investor expecations for interest rate rises, with many now calling the end of the Federal Reserve's rate-hiking cycle.

The USD/JPY saw a massive decline in Asia hitting a 104.10 low, ahead of the latest very strong recovery. We remain bearish on USD/JPY, while the 109.16 Fibonacci level remains intact. 109.16 Fibo is a 50% retrace of the 114.21 to 104.10. We have placed a sell order at 108.50.

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