"With regard to the outlook, Japan's economy is expected to continue a moderate recovery as a trend, while it will be affected by the front-loaded increase and subsequent decline in demand prior to and after the consumption tax hike"
-Bank of Japan
It was not a surprise the Japanese central bank kept monetary policy steady during the meeting on Friday, as well as maintaining the view the domestic economy is improving moderately. The Bank of Japan members unanimously voted to leave the pace of the stimulus between 60 and 70 trillion yen per year.
While the economy is benefitting from measures done by Shinzo Abe's team, the Bank of Japan has expressed its concerns the April consumption tax hike may derail the growth. On October 1 Abe announced the tax will be increased to 10% from the current level of 5%, starting with a jump to 8% in April. This measure is introduced in attempt to cut the government's mounting debt burden. Meanwhile, in order to prevent a possible damage, the government plans to cushion the blow with a 5.5 trillion yen fiscal stimulus package. According to analysts' forecasts, the tax rise may drag the economy into recession, after a similar move made in 1997 pushed the economy into the deflationary state.
One thing is certain– Fed's tapering is contributing to weaker Yen– one of the key factors of economic growth for export-oriented Japan. A 17% slide against the Dollar this year has fuelled consumer prices and boosted companies profits. The latest projections are showing the USD/JPY currency pair can drop to 115 in the coming months.
© Dukascopy Bank SA