BoJ Lowers 2021 Growth Outlook on Coronavirus Restrictions, USDJPY Risks More Pullbacks

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Amid speculation that BoJ economic growth estimates have been cut, the yen is strengthening despite a growing risk-off mood due to rising coronavirus fears. The yen has risen sharply as a result of risk aversion.

According to a news report citing four sources familiar with the central bank’s thinking, the BOJ is expected to cut growth forecasts for the fiscal year 2021/22 in its latest quarterly projections due out next week, as another state of emergency for Tokyo risks negatively affecting consumption.

Japan’s leading economic index fell to 102.6 in May from 103.8, below the 103.5 forecasts. Bank lending in Japan rose 1.4% YoY in June, below expectations of 3.0% YoY. Eco Watcher sentiment rose to 47.6 in June from 38.1, above expectations of 41.9. The current account surplus widened to 1.87 trillion yen in May, higher than expectations of 1.59 trillion yen.

“But the central bank is likely to maintain its view that the world’s third-largest economy is heading towards a moderate recovery as strong exports and output offset some weakness in consumer demand.” “The basis for a recovery is in place, but the timing may be somewhat delayed as the constraints hold back the expected economic recovery in the current quarter.” “According to new estimates, the Bank of Japan is likely to revise its forecast for consumer inflation for this fiscal year, mainly given the recent rise in energy prices.”

This came after Japanese Prime Minister Yoshihide Suga officially declared a state of emergency in Tokyo just two weeks before the Olympics. There were 920 new infections in Tokyo on Wednesday, the most since May 13.

BoJ: USDJPY Risks More Pullbacks

During the first half of the European session, the USD/JPY pair saw significant selling and fell to near three-week lows, around the 109.75 regions. At the time of writing, USD/JPY is down 0.62% at 109.96, having hit the lowest levels in two weeks at 109.75 earlier on.

Concerns about the economic consequences of the highly contagious Delta strain of COVID-19 spreading have weighed on global risk sentiment. This was demonstrated by a sharp drop in equities markets, which raised the demand for the traditionally safe-haven Japanese yen and put pressure on the USD/JPY cross.

The drop pulled the USD/JPY pair deeper below the 110.40 support, which marks the lower boundary of an ascending trend-channel stretching from the monthly swing lows in April. As a result, the strong intraday drop could be linked to some technical selling in the context of slight US dollar weakness.