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BoJ discusses sustainability of monetary policy, Yen Falls

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Minutes of Bank of Japan monetary policy meeting released; Yen loses steam; Japan’s economic data beat expectations.

The Bank of Japan recently released the minutes of its monetary policy meeting in which policymakers discussed ways to make their monetary stimulus measures more sustainable.

One member suggested adjusting the bank’s purchases of risky financial assets, while others debated how to achieve the bank’s two percent inflation target.

Most members agreed that the bank’s moves to ease corporate finance channels are having the intended effects and that the institution should not hesitate to do whatever is needed to deal with the spread of the coronavirus.

So far, 200,658 cases of COVID-19 and 2,944 total deaths have been reported in Japan. Cases are increasing and doctors are sounding the alarm because of the rapid progress of the virus. Despite this, the prime minister reiterated that there was no need to call for a state of emergency.

“We have to show the results of our countermeasures against the coronavirus,” the prime minister said during the interview. “I will lead the effort with the mindset of doing whatever needs to be done.”

At the bank’s last meeting, the monetary policy committee decided to leave the short-term cash rate unchanged at -0.1 percent.

The markets did not learn much about the current state of the Japanese economy this week.

The government office said the headline economic index for October stood at 94.3, after reading 93.3 the previous month and beating expectations of 93.8. The Coincident Index was lower than expected at 89.4 after coming in at just 84.8 in the previous month.

On Friday last week, the Bank of Japan announced its decision to leave cash rates unchanged at -0.1 percent, remaining in line with analysts’ expectations.

The Japanese yen has lost 0.10 percent against the U.S. dollar so far this week, snapping a two-week winning streak. Meanwhile, the greenback is gaining ground against a pack of its major rivals, recovering from the previous week’s losses, advancing 0.49 percent after falling 1.06 percent.

The relative strength of the yen concerns Japanese politicians, who are clearing the way for intervention in the foreign exchange market. Exporters need the exchange rate to stay around 100 yen to the dollar.

“Make sure the yen-to-dollar exchange rate does not exceed 100 yen,” Prime Minister Yoshihide Suga told finance ministry officials.

Despite the government doing what it can to avoid this situation, analysts expect it to break this barrier only once, especially considering the recent weakening of the US dollar.

“The strength of the U.S. economy and years of Japanese monetary easing have prevented adjustments, but the yen’s move may pick up a bit next year given the state of the U.S. and its monetary policy setting,” said a State Street analyst.

The numbers are in favor of the Japanese economy, which largely beat analysts’ expectations. Economic growth rose 5.3 percent in the third quarter, against forecasts of 5.0 percent, but remained below the 7.9 percent in the second quarter.

The consumer price index also surprised analysts when it rose 1.2 percent on an annualized basis, unchanged from the previously published figure. In monthly terms, the index rose by 0.2 percent, also unchanged from previously published data, but higher than forecasts of 0.1 percent.

The unemployment rate also improved with the current rate at 6.7 percent after 6.9 percent the previous month and better than expectations of 6.8 percent.

Basic chart

With the New Year next week, not much relevant news is expected, apart from the industrial production data for November, which will be released on Sunday.

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