By Chris Tedder, Research Analyst, Forex.com

The Bank of Japan elected not to adjust its current easing plans. Instead, the bank retained its commitment to its plan announced in April to increase the supply of money in the economy by 60-70 trillion a year. At the same time the bank upgraded its economic assessment of Japan. This was all expected and fairly mundane, the market was really looking for guidance on how the BoJ plans to address the threat of rising bond yields. The bank’s statement made no mention of yields but it did reiterate that it was keeping an eye on upside and downside surprises.

Earlier this week Kuroda stated that it’s natural for yields to rise steadily as the outlook for growth improves.  Nonetheless, if yields continue to rise it could seriously undermine the bank’s attempts to stimulate growth, as rising yields may hinder the ability of companies’ to raise funds.

However, the BoJ’s commitment to growth and inflation may see it expand its easing plans later this year. Tonight, BoJ Kuroda speaks and we expect him to attempt to calm market fears about rising yields and signal the bank’s commitment to spurring growth and inflation. In the unlikely event that Kuroda is vocal about the negative impacts of the BoJ’s easing plan, then we expect to see a significant pull back in USDJPY.

Imports prices are becoming a concern for Japan

The BoJ’s plan to swell Japan’s monetary base has resulted in a flock away from the yen, which is great for exporters but not for importers. Trade data today highlighted the challenges of rising import prices due to a weaker yen. While imports remain strong, the threat of rising prices on a struggling economy is very concerning. On the other side of the equation, a weaker yen is great for exporters as their products become more competitive.

Japan’s April trade deficit widened to 879bn as rising imports prices overshadowed a surge in exports due to a weakening yen. Imports increased 9.4% and exports jumped 3.8%. Overall, the market took this as a positive, but if the yen weakens much further imports may start to struggle and, in turn, drag down Japanese equities.

Source: Forex.com