AUD/JPY: Abe Reiterates Tough Stance on Deflation

The Japanese yen is foreseen to regain strength opposite the Australian dollar today after Japanese Prime Minister Shinzo Abe continued to pile pressure on the Bank of Japan to make good on its promise for bolder action to overcome nagging deflation in a speech yesterday. Meanwhile, a marked improvement in Australian business confidence is deemed to support the Aussie today.

In his first policy speech to the parliament since taking power, Japan’s PM Shinzo Abe, vowing to overcome what he called an economic crisis, urged the BOJ to hit its inflation target as soon as possible, reiterating once again his tough stance on persistent deflation. Abe has made reviving the economy with a mix of easy monetary policy and fiscal spending his top priority since returning to power with an election win in December. Succumbing to intense government pressure, the BOJ last week doubled its inflation target to 2 percent, made an open-ended commitment to buy assets, and issued a joint statement with the government promising to meet the price target at the earliest possible time.

In his speech, the prime minister included the strength of the Yen alongside deflation as root causes of the prolonged economic stagnation. “The biggest and most urgent task for our country is to revive the economy,” Abe said, because he believes that protracted deflation and the strength of the Yen are shaking the foundation of trust in the society. For his part, Abe vowed to map out a growth strategy to boost private investment and consumption after rolling out $117 Billion in spending. As such, he expressed that it is vital that both the government and the BOJ each commit to achieve the 2 percent price goal as soon as possible.

Over to the Land Down Under, interest rate cuts and positive developments in the US and China have managed to significantly improve business confidence. The National Australia Bank’s monthly survey showed business sentiment surged to 12 points in December, from -9 to 3 points. The increase is the largest jump in sentiment since October 2001. The NAB said confidence had been boosted by the December rate cut, a last minute deal among US politicians to avoid the fiscal cliff, and signs of stabilization in the Chinese economy. Considering these, a long position is advised for the AUD/JPY trades today.

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