USD/JPY Rises As COVID-19 Resurgence Could Trigger Double-Dip Recession

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The Japanese yen weakened against its US counterpart on Tuesday as market analysts warn about a double-dip recession in the world’s third-largest economy. With a growing number of COVID-19 infections and a central bank signaling prolonged monetary support mechanisms, the yen maintained its downward trajectory. Although officials see the potential upside over a slumping currency, the yen could face unintended consequences over another wave of the coronavirus.

On Monday, the Bank of Japan (BoJ) held its April policy meeting where it left the benchmark short-term interest rate at -0.1% and kept its target for the ten-year government bond yield at 0%. Policymakers stated that it would not hesitate to employ additional easing measures if it were necessary to stimulate economic growth.

Looking ahead to the remainder of the fiscal year, Tokyo forecasts the gross domestic product (GDP) to grow 4%, slightly up from its 3.9% prediction in January. The institution did, however, slash this year’s price forecast and predicted that inflation would fall short of its 2% target beyond Governor Haruhiko Kuroda’s term that ends in 2023.

Overall, the BoJ is worried about “high uncertainty” over how much the COVID-19 public health crisis could weigh on the recovery as Japan declared a third two-week state of emergency for Tokyo, Osaka, and two other places.

The central bank wrote in its quarterly policy report:

“Japan’s economy is likely to recover, though the level of activity will be lower than before the spread of the pandemic mainly for sectors that offer face-to-face services.

We will take additional monetary easing steps without hesitation as needed with a close eye on the impact of the pandemic.”

Japanese YenIs a double-dip recession on the horizon? Financial analysts are already ringing alarm bells.

“The risk of a double-dip recession has clearly heightened,” said Hiroshi Shiraishi, senior economist at BNP Paribas Securities. “The impact of imposing curbs on Tokyo and Osaka alone would be quite big.”

On the data front, the Cabinet Office’s Leading Economic Index edged up to 98.7 in February and the Coincident Index tumbled to 89.9.

Japan reported more than 3,800 cases on Monday, bringing the seven-day average to just under 5,000 for the first time since January. In total, the country has confirmed 572,000 total cases and close to 10,000 deaths.

The USD/JPY currency pair rose 0.59% to 108.73, from an opening of 108.09, at 19:32 GMT on Tuesday. The EUR/JPY increased 0.59% to 131.43, from an opening of 130.65.

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