Japanese Yen Gains on Hawkish BOJ, Capped by Bearish Forecasts

The Japanese yen is posting a modest rally against its American counterpart midweek as the central bank and the federal government send bullish messages to the market. But the tepid gains were capped by bearish economic data and forecasts. Despite fears of a pending trade war with the world’s largest economy, the yen has been performing admirably against the greenback in 2018.

On Wednesday, the Bank of Japan (BOJ) warned that higher long-term interest rates may be in the nation’s future. Arguing that it could aid financial institutions to widen their margins, rate hikes might prevent a crash to the country’s banking system.
BOJ board member Yukitoshi Funo told a news conference:

Monetary policy is not the only factor affecting financial institutions’ profits. But in general, a steeper yield curve would have a positive impact on financial institutions because it would widen margins for them.

That does not mean Tokyo will change direction anytime soon. The BOJ has already announced it is maintaining its ultra-loose monetary policy to ensure the country can sustain an economic downturn.
Meanwhile, Prime Minister Shinzo Abe confirmed last week that his government is considering delaying a proposed sales tax hike planned for October 2019. Should economic conditions weaken by then, Abe said that he would delay the increase for a third time if it is necessary.
This comes as new figures show that household spending declined 1.6% in September from a year earlier, falling below market expectations of a 1.6% increase. The dip is being blamed on the string of natural disasters that struck the world’s third-largest economy this past summer.
A new Reuters poll found that most experts agree that Japan’s economy will shrink in the third quarter, stemming from the natural disasters, lower foreign demand for Japanese products, and sliding private consumption. Economists say gross domestic product for the July-to-September period will contract 0.3%.
The Cabinet Office’s coincident index, a measurement of jobs, retail sales, and industrial output, tumbled 2.1 points in September from the previous month.
The USD/JPY currency pair dropped 0.18% to 113.23, from an opening of 113.43, at 14:01 GMT on Wednesday. The EUR/JPY rose 0.29% to 130.00, from an opening of 129.60.

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