(19 DECEMBER 2018)DAILY MARKET BRIEF 2:BoJ set to maintain lose monetary policy unchanged by year end

Facing the hardest contraction in four years during the third quarter of 2018, the Japanese economy is facing difficulties amid a weakening business outlook. Recently, the Japanese cabinet has been revising its growth forecast for the economy to the downside for 2018 and 2019 to 0.90% and 1.30% from prior 1.50% estimate while the BoJ is expecting a more conservative scenario for 2019, with annual GDP growth numbers below 1%, thus confirming that the central bank authority will be maintaining its ultra-loose monetary policy by the end of its two-day meeting ending on Thursday.

Indeed, as the Japanese trade deficit is widening in two consecutive times, with November numbers given at JPY -737.3 billion ($ -6.5 billion) due to a sharp rise in imports from the US and stagnant export numbers, it seems clear that the BoJ is not expected to move its policy rate so far maintained at -0.10% since 2016. Additionally, given current state of trade dispute between China and the US, which ultimately threatens a total disruption of supply chains in exporting regions such as Japan, New Zealand and Europe for instance, and the resumption of trade talks with the US in January, it becomes apparent that further trade widening due to lower external demand of goods and larger imports of US goods should occur.

We would therefore expect Japanese export volumes to drop amid a global economic slowdown in the periods to come. However, the outlook could be changing rapidly if uncertainties in the economy start dropping.

USD/JPY is currently valued at 112.37, heading along 111.80 short-term.