The Bank of Japan kept its monetary policy unchanged leaving rates at 0.1% while keeping QE at the same levels, disappointing the currency market and sending USDJPY below the 78.50 mark in afternoon session Asian trade. The BOJ acknowledged that the export sector was under pressure, but also noted that domestic demand has remained relatively firm.

In its monthly report, the BOJ stated, “Japan’s economic activity is leveling off more or less. Exports and industrial production have been relatively weak as overseas economies have moved somewhat deeper into the deceleration phase. On the other hand, domestic demand has been resilient, mainly supported by reconstruction-related demand. Specifically, public investment has continued to increase, and housing investment has generally been picking up. Private consumption has been resilient with the employment situation on an improving trend. As for business sentiment, firms have turned somewhat cautious mainly against the background of the
deceleration in overseas economies.”

Looking ahead, the BOJ noted that risks to growth remain high with uncertainty surrounding, “the prospects for the European debt problem, the momentum toward recovery for the U.S. economy, and the likelihood of emerging and commodity-exporting economies simultaneously achieving price stability and economic growth. Furthermore, attention should be paid to the effects of financial and foreign exchange market developments on economic activity and prices.”

Yet despite the clear slowdown in Japanese economy the BOJ refused to take any further monetary policy action, stating only that the “The Bank continues to conduct monetary policy in an appropriate manner.” The reticence of Japanese authorities to act forcefully, especially in light of dramatic moves by both the Fed and the ECB has left the market disappointed once again with USD/JPY slipping below the 78.50 level ahead of today’s NFPs. Japanese fiscal officials are clearly concerned about the effects of strong yen on the country’s export growth but with monetary policy in paralysis, there are no major catalysts to change the current dynamic. If today’s US payrolls numbers disappoint they could push the pair even lower towards the 78.00 figure as the day proceeds.

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