USD/JPY: Bank of Japan Easing Views Weighing on the Yen

The Japanese yen is foreseen to weaken opposite the US dollar today after sources reveal that the Bank of Japan will likely cut its growth forecasts and could debate expanding its asset-buying program later this month. Meanwhile, buoyant housing figures are deemed to continue shoring up demand for the US dollar on improved prospects for the world’s largest economy.

The BOJ holds its next policy meeting on October 30, and sources familiar with the matter say that the central bank will slash its long-term economic and price forecasts in a bi-annual outlook report and admit that it will miss its 1 percent inflation target for many years. Growth forecasts are seen to be cut from the 2.2 percent projected in July to below 2 percent. Meanwhile, the core inflation forecast of 0.7 percent for the following fiscal year is also deemed to be slashed by several percentage points to reflect downward pressure from the economic slowdown. The central bank is feeling the heat from the Japanese government, which downgraded its economic evaluation for the third consecutive month in October and announced yesterday a plan to outline a stimulus package designed to stimulate growth. Failure to achieve the inflation target would further intensify pressure from lawmakers for bolder action to combat deflation.

The BOJ is seen to consider easing policy if it feels that risks have escalated enough to further impede Japan’s recovery and the timing for achieving its 1 percent inflation target. Indeed, while the Japanese economy has outperformed most of its peers in the Group of Seven nations earlier this year, weak foreign demand and a strong Yen have led many economists to predict that growth will likely stall for the rest of this year. If the central bank were to act, analysts say that the most likely option would be to increase its 80 Trillion Yen asset buying and loan program by around 5 to 10 Trillion Yen. Another option they could consider is adding on its target for purchases of exchange-traded funds and real-estate investment trust funds. Amid these easing views, the Yen is seen to give way today.

Over to the US, doubts that the housing market has turned the corner have seemingly been erased by yesterday’s Housing Starts and Building Permits reports. The Commerce Department said that builders began construction on homes in September at the fastest rate since July 2008, increasing by 15 percent on a monthly basis. Application for permits, a sign of future construction, also rose by nearly 12 percent, also the best reading since July 2008. Ultra low mortgages have encouraged more Americans to enter the market, and the surge in construction suggests that builders believe the housing recovery is sustainable. On positive signs that housing could help the economy grow in the coming months, the Greenback is believed to rise, warranting a long position for the USD/JPY trades.

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