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Heads up, yen traders! The Bank of Japan will be announcing its monetary policy decision later this week, and rumor has it that they could boost stimulus.

Before we get into that, let’s first review why this top-tier event is a big deal, what happened in the previous statement, and how the yen reacted.

Why is this event important?

As you’ve learned in the School of Pipsology, foreign exchange rates are affected by interest rates and money supply, which in turn are dictated by central banks.

Increasing money supply through asset purchases or cutting interest rates usually lowers the currency’s value. On the flipside, tightening monetary policy through higher interest rates or reducing money supply tends to boost the currency’s value.

In short, the yen could be in for big moves if the Japanese central bank decides to announce a change in monetary policy!

What happened last time?

In their October policy statement, the BOJ opted to sit on its hands and keep interest rates on hold at -0.10% while maintaining bond purchases as well.

Keep in mind that the central bank has already doled out a stimulus package designed to support lending activity and funding for businesses amid the pandemic.

Although BOJ Governor Kuroda noted that an economic recovery is taking place, officials still downgraded this year’s growth and inflation forecasts in their quarterly outlook.

On a more upbeat note, the BOJ revised its 2021 forecasts, including estimates for exports and output. This could be why the yen chalked up some gains against its rivals after the announcement!

Overlay of JPY Forex Pairs 15-min Charts
Overlay of JPY Forex Pairs 15-min Charts

What’s expected this time?

Even though the previous BOJ statement had some positive points, policymakers hinted that they’re open to extending the deadline of their stimulus program – something they might make official in this upcoming announcement!

The aid package is due to expire in March 2021, but the central bank might want to extend the buffer until much later in the year.

Some say that no extension at all or a short one until June could reflect stronger confidence from the BOJ that the economy could recover by then. A much longer extension until December, on the other hand, could be less reassuring for the Japanese economy.

In any case, brace yourself for a potentially volatile reaction among Japanese yen pairs during this major event. Either practice proper risk management if you’re trading the news or just stay on the sidelines if you’re not comfortable with possible price spikes!