More volatility in USD/JPY is ahead of us. According to Bloomberg news on Friday, the Bank of Japan (BOJ) will consider introducing negative lending rates on some loans in order to stimulate the economy, in the upcoming BOJ meeting this week.

USD/JPY rallied over 1% to 110.50 after this news was released. Other expectations, including a deeper cut to the current negative deposit rates and expanding the asset purchase program, were also the subject of much debate between market participants.

This comes against the backdrop of negative deposit rates launched early this year, which did little to help spur lending activities. Since the sub-zero rate went into effect earlier this year, banks’ profit margins from lending to highly rated companies have dropped to their lowest levels in almost a decade. The BOJ’s quarterly survey also showed that demand for credit from large, medium and small-size firms all dropped.

Officials said that adding this to the central banks’ arsenal could have a positive impact on the economy. However, this will further squeeze the commercial lender’s margin, which has already been penalised by existing negative deposit rates.

USD/JPY rallied over 2% to 111.79 on Friday. Nikkei futures soared to 17,730 during US trading hours. Expectations are gradually building up and being priced in. Any surprises from the BOJ meeting could dampen the market’s enthusiasm and magnify the volatility.


Key technical levels to watch:

  • Immediate resistance level: 112.00
  • Immediate support level: 110.00

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