The dollar-yen exchange rate didn’t react much after the two-day Bank of Japan (BOJ) policy meeting turned out to be a non-event. BOJ Governor Haruhiko Kuroda said on Wednesday that he saw no immediate need for any additional near-term quantitative easing (QE) stimulus. 

The last QE stimulus, announced by the BOJ in October 2014, called for the bank to increase its asset purchases to 80 trillion yen at an annual pace, from the previous 60 to 70 trillion yen target range.

The BOJ now seems to be convinced about the strength of the Japanese economic recovery as industrial output and exports have shown some signs of improvement. This is despite the fact that Japanese fourth quarter GDP came in on Monday at 2.2%, below economists’ expectations of a 3.7% gain. Some BOJ members are voicing concerns about the weak yen as the consumer price index (CPI) and real wages continue to fall. 

Here are some mixed economic data from Japan. Japan's industrial output rose 1.0% in December from the previous month but missed the forecast for a 1.3% increase. While exports jumped 17% year over year in January, beating expectations for an 11.9% rise, imports fell 9.0%, compared to a forecast for a 4.8% decline. Analysts blamed multi-year low oil prices for the larger-than-expected drop in imports.

Since December, the dollar-yen exchange rate has been trading sideways in the range between 120.50 yen per dollar and 115.50 yen per dollar as Forex traders believe that there are still big challenges ahead for Japan’s economy, while the Fed is getting closer to hiking interest rates. The Federal Reserve minutes, just released this week, suggested otherwise, meaning that the Fed is thinking that it might be too soon to hike rates while the U.S. economy is still recovering. 

Recent U.S. economic data supports the Fed’s argument as it shows no signs of a pick-up in consumer spending or retail sales, despite an improvement in the U.S. job market, upbeat consumer confidence, and cheaper gas prices. 

The Bureau of Economic Analysis (BEA), the U.S. Commerce Department, said earlier this month that core retail sales excluding automobiles, gasoline, building materials and food services rose 0.1% in January. Economists had expected an increase of 0.4%. 

Sluggish retail sales data came on the heels of the BEA’s report showing the headline personal consumption expenditures (PCE) index rate for December was up 0.75% year-on-year, down from 1.15% the previous month. The core PCE index printed at 1.33%, also down from the previous month's 1.40%. 

Based upon the PCE and retail sales number, Barclays has already trimmed its first-quarter 2015 U.S. GDP growth estimate from 2.5% to 2.2% while J.P. Morgan cut its estimate from 3% to 2.5%. 

There are good reasons to believe that the 2014 and 2015 U.S. GDP growth estimates may have to be revised downward. Mr. Jason Furman, chairman of the president’s Council of Economic Advisers, told reporters on Thursday that the U.S. economy will grow at a 3% inflation-adjusted rate in 2015, up from 2.1% in 2014. 

Mr. Furman’s numbers are well below the 2014 real GDP advance estimate of 2.4%, released by the BEA, and the current average U.S. GDP forecast of 3.2% for 2015, based upon 82 economists polled by Reuters. 

The BEA will release its second estimate 2014 U.S. GDP on February 27 and advance estimate first quarter 2015 GDP on April 29. The dollar-yen exchange rate might pull back to retest the 115.50 yen per dollar support if the GDP data disappoints the markets.

We would like to point out that there is a strong correlation between the dollar-yen exchange rate and the performance of the Nikkei 225. One of the obvious reasons is because the weak yen is helping to boost earnings of the big Japanese exporters, which is sending the Nikkei 225 to multi-year highs.

Last October, the Japan Government Pension Investment Fund (GPIF), which manages over 120 trillion yen, said that they set allocation targets of 25% each for Japanese and overseas equities, up from 12% each. GPIF also said that they will reduce domestic bonds to 35 percent of assets from 60 percent. 

The equity purchases by both the GPIF and the BOJ could backstop the Nikkie 225 from a deep pull-back and provide a near-term support for the dollar-yen exchange rate from falling below 115.50 yean per dollar level.