USD/JPY Setup Ahead of the Final Bank of Japan Meeting for 2023

USD/JPY Analysis

Bank of Japan Unlikely to Move on Rates, Inflation out on Friday

The Bank of Japan (BoJ) will provide an update on monetary policy in the early hours of tomorrow morning but any hope of a policy pivot appears to have dried up in the last week. Last week Monday Bloomberg reported on a story in which it suggested the Bank of Japan is not looking to the December meeting when it comes to potential interest rate changes.

This would make sense as Q1 ought to provide the bank with greater clarity on wage growth as the country’s largest labour unions negotiate yearly increases on January the 23rd, with the process due to be finalized in March – setting up Q2 as a more realistic time frame for a major policy change. Japanese inflation has breached the 2% target for over a year now but the bank is looking for reassurance that the underlying causes of inflation have transitioned from a supply side issue to demand driven factors.

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Recent drivers of USD/JPY price action can be linked to a narrowing yield differential (US 10-year yield minus the Japanese 10-year yield). The chart below depicts this relationship and it is clear to see that the pair follows this relationship rather closely. Recently, a sharper decline in US yields has improved the differential from a Japanese point of view.

USD/JPY (Orange) with US-Japan Yield Differential (blue)

Source: TradingView, prepared by Richard Snow

USD/JPY Counter-Trend Drift Continues Ahead of BoJ Meeting

USD/JPY continues to trade within the broader ascending channel but failed to break below a notable zone of support. The zone of support emerges at the lower bound of the ascending channel (support) and the August swing low of 141.50. In amongst the considerations is the 200-day simple moving average (SMA).

The current landscape allows for well-defined levels of consideration should the pair pullback even further or head lower should the medium-term trend prevail. A move to the upside brings the 145 level into focus while the zone of support presents an immediate hurdle to the bearish continuation but a hawkish BoJ statement could result in a test of 138.20.

Of course, market participants will be dissecting every word of the BoJ statement for clues that may narrow down the time frame of the anticipated policy reversal. However, the BoJ may decide to keep markets waiting a while longer.

USD/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX