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USD/JPY Falls As BoJ Promises Monetary Policy Review Amid Recovery

February 19, 2021 at 13:01 by Andrew Moran

Japanese coinsThe Japanese yen strengthened against its US counterpart to finish the trading week amid reports that the central bank is reconsidering loose monetary policy to spur economic growth. This comes as the Bank of Japan (BoJ) conceded that the world’s third-largest economy is recovering and returning to pre-pandemic levels.

Speaking to reporters this week, following his meeting with Prime Minister Yoshihide Suga, BoJ Governor Haruhiko Kuroda noted that the institution plans to review its monetary policy stance. In addition, he reassured observers that exports and the gross domestic product (GDP) are close to recovering to times before the coronavirus pandemic paralyzed the world.

But while BoJ policymakers will review monetary policy tools, Kuroda dismissed suggestions that the organization would exit from its exchange-traded funds (ETFs) positions. Under the current framework, the BoJ can buy ETFs at an annual pace of $56 billion in principle, with the upper limit set at $115 billion. With the financial markets popping, Kuroda denied that the central bank’s measures were fueling the rally. Instead, he cited optimism in the global economic outlook.

It’s likely to take significant time to achieve our price (inflation) target. As such, now is not the time to think about an exit including from our ETF buying.

Optimism over the global economic outlook and steady vaccine rollouts may be behind the recent surge in stock prices. But the global outlook remains highly uncertain.

That said, Kuroda conceded that the central bank would be watching for financial risks associated with extended easing. Still, after the last policy meeting, the Policy Board revealed that it “may increase or decrease the amount of purchases depending on market conditions.”

On the data front, the Jibun Bank manufacturing purchasing managers’ index (PMI) came in at 50.6 in February, up from 49.8 in January — anything above 50 indicates expansion. The services PMI fell to 45.8, while the composite PMI edged up to 47.6.

The inflation rate increased 0.5% in January for the first time since July. On an annual basis, however, the consumer price index (CPI) slumped 0.6%.

The balance of trade narrowed for the first time since June, with exports surging 6.4% year-over-year in January and imports plummeting 9.5% last month.

Machinery orders advanced 5.2% in December, beating the market forecast of a 6.2% drop. On an annual basis, machinery orders have surged 11.8%, up from the 11.3% fall in November.

The bond market was mostly mixed to close out the trading week, with the benchmark three-year note slipping 0.003% to -0.116%. The three-monte note added 0.001% to -0.089%, while the 30-year bond shed 0.008% to 0.678%.

The USD/JPY currency pair tumbled 0.34% to 105.32, from an opening of 105.71, at 11:55 GMT on Friday. The EUR/JPY was flat at 127.81.

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