What Lies Ahead for the Bank of Japan

Overnight, some economic data was released from Japan which was unfortunately disappointing. For example, adjusted trade balance figures came in at -0.36T when the market was expecting -0.7T, and exports (YoY) was 0.6% below the market forecast of 3.4%. The imports (YoY) figure came at -11.1% which is stronger than expected. Trade balance was also negative at -114B when 84B was expected, and industrial activity index (MoM) also dropped to -0.2%.

These economic data points indicate that economic activity in Japan is slowing down, and most importantly, that trade activities declined sharply in Q3. Exports have dropped significantly, and likewise industrial activities and trade balance. This is very bad for the Japanese economy, especially as it points to lower growth. The market awaits the next Bank of Japan (BOJ) meeting coming up the end of the month, which will look at these poor economic data and at growth in Japan; there is a possibility of more intervention by BOJ in terms of quantitative easing in order to stimulate economic activities.

However, the decline in economic activity in Japan might be attributed to the spillover effect from Chinese economic uncertainty, something which has affected global economic growth, particularly trading activities with emerging markets. This might actually be a reason the BOJ will consider leaving policy unchanged regarding more stimulus. But if the continuous decline in economic activity persists over the next couple of months, the Bank of Japan will have no option but to introduce more quantitative easing.

The market will see a rally on Nikkei to the upside and a weaker Japanese yen (JPY) to the downside. USDJPY will rally on the back of more quantitative easing from Bank of Japan and the price might trade as high as 127.00 by the end of the year. If the Bank of Japan fails to act, the Japanese yen (JPY) will strengthen and will put more downside pressure on the Nikkei and most importantly, USDJPY might drop back to 118-117.

The Japanese yen (JPY) has dropped significantly on the back of these weaker than expected trade data points released and USDJPY now trades above 120.00.