Stronger Japanese Inflation to Spur Yen Correction as BoJ Sits Pat

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Stronger Japanese Inflation to Spur Yen Correction as BoJ Sits Pat

Fundamental Forecast for Japanese Yen: Neutral

The USDJPY climbed to a fresh yearly high of 104.62 as the Federal Reserve unexpectedly tapered its asset-purchase program by $10B, but the fundamental developments due out next week may spur a near-term correction in the dollar-yen as the Bank of Japan (BoJ) retains its pledge to achieve the 2% target for inflation by 2015.

The headline reading for Japanese inflation may prop up the Yen as price growth is expected to accelerate to an annualized 1.5% in November, while core consumer prices are projected to increase 1.1%, which would mark the fastest pace of growth since October 2008. As the outlook for growth and inflation improves, it seems as though the BoJ will largely preserve its wait-and-see approach throughout the first-quarter of 2014, and Governor Haruhiko Kuroda may persistently resist calls to further embark on the easing cycle as Prime Minister Shinzo Abe continues to draw up the ‘Third Arrow’ stimulus package.

With that said, the BoJ Minutes schedule for December 24 may highlight a more neutral tone for monetary policy, and a material shift in the policy outlook may help to limit the downside for the Japanese Yen as Governor Kuroda does not anticipate a material change in its bond-purchasing program for 2014.

From a technical standpoint, the USDJPY appears to be at risk for a near-term correction as the pair marks a higher high (104.62), and the Relative Strength Index may foreshadow a larger decline in the coming days as it struggles to push back into overbought territory. - DS

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