Despite dovish commentary from the Bank of Japan, the USD/JPY continues to form a bear flag pattern in the wake of their monetary policy decision on Tuesday. The bank kept rates unchanged and committed to monetary easing including their quantitative easing program. The program will last until the Central Bank’s inflation target of 2% is reached.  Despite dovish statements, the yen continued to rise against the dollar and could move lower on a break of support.

The Bank of Japan’s Interest Rate Decision

The Bank of Japan kept interest rates unchanged. In their post meeting comments, the BoJ’s Kuroda sounded dovish at the Bank’s press conference. He said that the central bank will remain strongly committed to monetary easing, including QQE, until the 2% inflation target has been reached (which doesn’t seem to be the case). He said that the BoJ remains committed to yield curve control and downplaying the January-9 announcement of a trimming in long-dated JGB purchases. He also said that day-to-day operations are not an indication of future monetary policy.

Governor Haruhiko Kuroda delivered a message to investors speculating that the Bank of Japan might be nearing the start of policy normalization. The BOJ’s board voted 8-1 to keep its interest rates and asset purchases at current levels. In a small sign of progress, it said that inflation expectations remained unchanged. The central bank forecasts the economy to grow 1.4% in the fiscal year starting in April with inflation of 1.4% over the same period.

Looking Forward

The Japanese December trade report which is scheduled for Wednesday should reveal a widening of the surplus. December national CPI which is scheduled for Friday should show the overall index rising to a 1.0% year over year pace from its previous pace of 0.6% with core reading at 1.0% year-over-year, from 0.9%. Tokyo January CPI is expected to be unchanged at 1.0% year-over-year overall and steady at 0.8% year-over-year on a core basis. December services PPI will likely be unchanged at 0.8% year-over-year.

U.S. production sentiment could remain positive which may buoy the dollar.

Production sentiment could be poised for continued strength in January despite headline declines in the early month measures. The boosts that sentiment has received from post-hurricane rebuilding and tax cuts, could persist through the early months of 2018.

Producer sentiment has mostly remained firm in January despite headline declines in the Empire State and Philly Fed. The Empire State headline slipped to 17.7 from 19.6 with the ISM-adjusted falling to 54.6 from 56.4. The Philly Fed fell to 22.2 from 27.9 in December, and the ISM-adjusted eased to 57.3 from 57.8 in December. Despite these minor slips ISM-adjusted average of all measures is positioned to hold at the 58 cycle-high for a fourth consecutive month.

The forex trading on the USD/JPY remains negative as the dollar has failed to gain traction.  Prices are forming a topping pattern with resistance seen near the 10-day moving average at 110.90.  Support is seen near the January lows at 110.13, and a break of this level would lead to a test of the September lows at 107.29.

By Taylor Wilman