USD/JPY: the yen reacts to Japan's recent budgetary and monetary measures

Japan occupies a special place in the world's economy. After WWII, its economy prospered, becoming one of the world's largest. For years it was the envy of many nations, until demographics and closed culture were no longer an ordinary problem.

Today, the yen is one of the most widely traded currencies on the forex and like the US's FED, Japan's central bank doesn't have inflation targets.

For decades, Japan has been fighting deflationary conditions, so economists no longer believe in the BOJ's ability to create inflation - that is why the mandate differs from those in the rest of the world.

Japan's actions regarding the virus situation

Because of the unique conditions it faces, the BOJ is one of the central banks that has always considered innovative policy changes. If it needed to reduce rates, it did so. If it needed quantitative easing, it went for it, more than any other country in the world.

The recent response to the virus situation shows that Japan is doing all it can. Last month, Japan's government approved an economic rescue package of 116 trillion yen, equivalent to about 19% of Japan's GDP. In dollar terms, this represents just over $1 trillion.

Yet this is not its first rescue package in response to the virus. The last one, in April, was about the same size.

For traders, the BOJ's measures are important as equity and currency traders keep an eye on the yen. Due to its low interest rate, US investors have long preferred to borrow JPY to buy US equities, while reversing the process when accounting for profits or selling shares.

This time, the Fed and the BOJ both have low interest rates and massive monetary stimulus. The difference will be in the fiscal space, where Japan is leading.

What will be the next reaction of the USD/JPY pair?