The Bank of Japan is expected to make no changes to monetary policy at its meeting on Friday and is likely  to maintain its commitment to raising the monetary base by ¥80tn on an annual basis until its 2% price stability target is both achieved and maintained. In addition to BoJ's meeting, the FOMC on Thursday and dynamics of general risk sentiments will be the key drivers for USD/JPY. 

The flucuations in global risk sentiment continues to drive the safe-haven Japanese Yen. Last week USD/JPY plunged below 116 temporarily, but recovered to above 118 when Japanese government officials were reportedly "closely monitoring the markets," and on the back of improving risk sentiment with the ECB hinting of a further easing. 
"We maintain our baseline scenario for the BoJ of no further easing, but with a risk of reactionary easing in April if USD/JPY falls persistently below 115 or the shunto wage negotiations result in a weak wage growth", says Barclays in a research note to its clients.

However, the sharp dips in both USD/JPY and Nikkei have increased market concerns about additional easing. The Nikkei newspaper also reported that the renewed decline in oil prices will likely to force the BoJ to cut its FY16 Core CPI forecast to 1% or lower from the current 1.4% and postpone the timing of achieving 2% from "around H2 FY16," putting an additional easing back on the table. 

The BoJ's stance is that while the global market remains weak, domestic demand remains firm and the inflationary trend should also continue to improve. The stimulus measures should provide support to the economy. The bank's outlook on economic growth is still above the potential growth rate (around 0.5%). Unless corporates start to feel uncertainty regarding hiring and investment, or demand continues to worsen, the BoJ believes that the 2% inflation target ultimately will be achieved. For this reason, the bank does not consider additional QQE measures necessary.

Further easing, if decided, may include an expansion of annual purchases of JGB, ETF, and J-REIT by JPY10trn (to JPY90trn), JPY1trn (to JPY4trn), and JPY60bn (to JPY150bn), respectively. Nevertheless, analysts believe that the further expansion of QQE will have more limited effect on the JPY amid external headwinds of fragile risk sentiments.
Investors keenly watch December Core CPI, December Industrial Production and December labor market data on Friday. Barclays forecasts December Core CPI to accelerate to +0.2% y/y (consensus: +0.1%) from +0.1% in November. It looks for a second consecutive month of decline in December Industrial Production by -0.3% m/m (consensus: -0.3%) after -0.9% in November. 

The labor market data is expected to remain unchanged with December unemployment rate at 3.3% (consensus: 3.3%) and job/applicants ratio at 1.26 (consensus: 1.26) versus 1.25 in November. The jobless rate remained below 3.5% (equivalent to NAIRU) for a while, and labour supply and demand has become tight. Meanwhile, the rate has been volatile during the past few months (3.4% in September, 3.1% in October, 3.3% in November). 

The Japanese yen managed to keep the upper hand over the US dollar in Asia, keeping USD/JPY down 0.4 percent at 118.31 yen, moving away from a 2-week high touched on Friday at 118.88.