BoJ may ease again to achieve 2 pct inflation target

Japan's economy grew at an annualised 1.5 percent in the final quarter of 2014, missing analysts' expectation of 2.2 percent, according to the latest report published by the Cabinet Office. On a quarter-on-quarter basis, the economy grew by 0.4 percent in the final quarter.

However, consumer spending in the October-December quarter was revised upwards, suggesting that some parts of the economy were improving. On the other hand, weaker than expected capital expenditure data suggests that the fiscal and monetary policies have so far been unsuccessful to stimulate higher level of investment in the country. Capital expenditure fell 0.1 percent as compared to expectations of an expansion of 0.3 percent.

"One reason for the disappointing capex is the shift in production overseas that has been happening for the past few years," said Norio Miyagawa, senior economist at Mizuho Securities. "I still expect the economy to continue to grow, but the virtuous economic cycle that policymakers have been talking about really hasn't fallen into place yet."

Moreover, falling oil prices is keeping the central bank under pressure. The Bank of Japan Deputy Governor, Hiroshi Nakaso said that the BOJ must ease monetary policy if cheap oil prices weaken its efforts to boost inflation expectations.

"Oil price falls may push down prices in the short-term but will accelerate inflation in the somewhat long-term perspective because they benefit an oil-importing economy like Japan," he said. "We will adjust monetary policy if the price trend changes and if further action is warranted to achieve our 2 percent inflation target at an early date".

USD/JPY is currently trading at 120.69 with a high of 121.11 and a low of 120.60. It has broken short term major resistance 120.50 and is currently trading around 121.04. It confirms the continuation of bullish trend and jump till 121.80. On the downside minor support is around 120.50 and any break below will target 120/119.65(200 day HMA). The pair's minor resistance is around 121.20 and above that level it will reach 121.85/123.

"New highs would be more constructive for the USD and put the market on track to test major resistance points above the market," explained analysts at TDS. "We look for USD/JPY to progress towards 124/125 fairly quickly if the USD can push through 121.85. Support is 120.45/50 but we rather doubt the USD will pullback in a material way just yet."