USD/JPY has posted strong gains on Tuesday, trading just above the 113 line in the European session. On the release front, the Bank of Japan maintained its monetary policy, but presented a bleak assessment of the economy. In the US, we’ll get a look at Retail Sales and PPI. The markets are braced for slight declines from these key indicators. On Wednesday, the FOMC will set interest rates and release a monetary policy statement.
The BoJ did not make any changes to monetary policy on Tuesday, but sounded pessimistic about the economy and warned that weak inflation will continue. The BoJ maintained its aggressive base money target of JPY 80 trillion and a 0.1 percent negative interest rate on some reserves held by the central bank. BoJ Governor Haruhiko Kuroda noted that exports and output is down, due to slowing growth in emerging economies. The BoJ surprised the markets in December when it adopted negative rates, but the markets and the public have soured on the move, which has failed to lift inflation or weaken the Japanese currency. Further easing steps will likely be revisited in April, with many experts expecting the BoJ to expand monetary stimulus next month.
All eyes will be on the Federal Reserve on Wednesday, as the Fed concludes a two-day policy meeting. Most experts are expecting the Fed to remain on the sidelines and not raise rates, given current economic conditions. Although the US economy continues to expand, growth has been softer in 2016 compared to the red-hot pace which marked the economy in H2 of 2015. The primary trouble spot in the economy is the inflation picture, as inflation levels remains very low, a result of weak global demand and low oil prices. Fed policymakers are divided on how to respond to persistently low inflation. Some FOMC members favor preempting inflation with a rate hike, while others feel that the economy is currently too fragile for such a move. The Fed will likely maintain its tightening bias and continue to monitor key economic indicators. If the US economy shows strength in H1 of 2016, a rate hike will be a strong possibility in the middle of the year.
