• As widely expected, the BOJ left unchanged a -0.1% target for short-term interest rates and pledged to guide long-term rates around 0%.
• Japan braces for tougher covid-linked restrictions due to wide spread of the Omicron variant.
• US dollar is high as traders braced for the possibility of a hawkish surprise from the Federal Reserve.

US dollar edged higher against the Japanese yen during the Tuesday Asian Session. BOJ’s monetary policy and the Covid woes could be the major catalysts behind the move.

The BoJ has left the 10-year yield target unchanged at 0.00% and also left the policy balance rate unchanged at -0.10%. The BoJ had cut the 2021 median Gross Domestic Product forecast to 2.8% from 3.4% but raised the 2022 median GDP forecast to 3.8% from 2.9%.

In a quarterly outlook report, the BOJ revised up its inflation forecast for the year beginning in April to 1.1% from the previous estimate of 0.9%. It also slightly raised its inflation forecast for fiscal 2023 to 1.1% from 1.0%.

The BOJ said in the report that “Risks to prices are generally balanced.” That compared with its assessment in October, which said risks were skewed to the downside.

The BOJ said “As wage increases give households more purchasing power, a broader range of firms will raise prices. That, in turn, will push up inflation and heighten public perceptions that prices will rise further, ” “Inflation expectations are heightening moderately,” the BOJ said, warning of the risk that price hikes could come faster than expected if global commodity costs remain high.

On Japan’s economy, the BOJ said its “recovery was becoming clearer” as the damage from the COVID-19 pandemic eased, a sign it was taking the recent spike in Omicron new coronavirus cases in stride. That was a more upbeat assessment than in October, when it said the economy was “picking up as a trend.”

Talking on the Covid woes, Japan had witnessed a jump in the daily infections and it is thinking to impose tougher covid-linked restrictions. “Japan is considering placing Tokyo and 10 prefectures under a COVID-19 quasi-state of emergency to curb rapidly spreading coronavirus cases, government sources said Monday,” per Kyodo news. Meanwhile covid cases in the US and the UK recede.

On the other hand, U.S. Treasury yields rose along the curve in Asia on Tuesday, lifting the shorter end to new pandemic highs as traders are bracing possibility of a hawkish surprise from the Federal Reserve. The Fed meets next week after a lead-in of fairly aggressive comments from officials highlighting the central bank’s readiness to act in the face of stubbornly high inflation.

“Hawkish Fed speak ahead of the blackout has reinforced odds of a March hike, with the market now pricing in 95% odds of a March rate “Hawkish Fed speak ahead of the blackout has reinforced odds of a March hike, with the market now pricing in 95% odds of a March rate hike and nearly four full hikes in 2022,” analysts at TD Securities wrote.

USD/JPY 4 Hour chart:

Support: 114.28 (S1), 113.95 (S2), 113.76 (S3).

Resistance: 114.80 (R1), 114.98 (R2), 115.31 (R3).

Amidst all the catalysts favoring the US dollar against the Japanese yen, we expect a bullish trend for USD/JPY.