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JPY Vulnerable, Bears Turn Cautious

A Report by CYS Global Remit Counterparty Sales & Alliance Unit 



The Japanese Yen (JPY) holds a significant position in the global currency market, with its value influenced by various factors. Primarily, the performance of the Japanese economy plays a crucial role, with indicators such as GDP growth, inflation, and industrial production impacting market sentiment towards the currency. Additionally, the monetary policies implemented by the Bank of Japan (BoJ) directly affect the value of the Yen. These policies generally include decisions on interest rates, quantitative easing programs, and interventions in the currency market.   


Furthermore, the Yen is often considered a safe-haven currency, leading to appreciation during times of global economic uncertainty. While the BoJ occasionally intervenes in currency markets, this is a rare occurrence and is subjected to political considerations. Currently, the BoJ’s ultra-loose monetary policy, coupled with widening policy divergence among major central banks, has contributed to the depreciation of the Yen against other currencies.

   


Bank of Japan Policy Meeting  


During the Asian session on Tuesday, 26 March, the Japanese Yen (JPY) maintained its sideways movement, remaining close to its year-to-date low against the US Dollar (USD). Comments made overnight by Japan’s Vice Minister of Finance for International Affairs, Masato Kanda, suggested that authorities are ready to take action to support the JPY, which provided some support to the domestic currency and acted as a barrier of resistance for the USD/JPY pair to rise.  


The minutes from the BoJ’s historical meeting, where officials decided to end negative interest rates, did not offer any new insights. However, this lack of new information is misaligned with the Bank’s commitment to transparency in its communication both before and after the March meeting.  


Officials reiterated that the 2% inflation target has yet to be achieved and signaled a cautious approach to interest rate hikes, diverging from the more aggressive stance seen in Western nations. This measured approach is expected to help keep the Yen under pressure due to its lower interest rates as compared to other currencies.  


Japanese Yen fluctuates amid diverse fundamental cues  

Japan’s Vice Minister of Finance for International Affairs, Masato Kanda, alleviated concerns about potential currency intervention on Monday. Kanda emphasized that the recent movements in the JPY were driven by speculation rather than fundamentals and that authorities would act against excessive fluctuations. Finance Minister Shunichi Suzuki echoed those sentiments, stressing the importance of stable currency movements aligned with underlying fundamentals.  


Meanwhile, the BoJ maintained its accommodative stance last week, refraining from offering clear guidance on the pace of policy normalization, which limited gains for the JPY. Despite consumer inflation in Japan surpassing the central bank’s 2% target, and positive outcomes from spring wage negotiations, further tightening of BoJ policy remains prospective.  


Bank of Japan board member Naoki Tamura stated that taking into consideration the prevailing economic and price projections, it is expected that the Japanese central bank will be looking to uphold accommodative monetary conditions in the foreseeable future.  


“Based on current economic, price outlook, BOJ likely to maintain accommodative monetary conditions for time being.”  

“Not there yet to allow market forces to fully drive long-term interest rate moves.”1  



USD contrasts with the JPY outlook  


In contrast, the Federal Reserve (Fed) revised its real GDP growth and core inflation forecasts upward last week. Despite concerns about persistent inflation and robust economic data, the Fed signaled its intention to lower interest rates by 75 basis points this year.   


However, Atlanta Fed President Raphael Bostic suggested on Monday that he anticipates only a single rate cut in 2024, expecting gradual economic and inflationary slowdowns.  


Chicago Fed President Austan Goolsbee concurred with three rate cuts in 2024, contingent upon progress in inflation and adherence to the central bank’s dual mandate. Fed Governor Lisa Cook acknowledged considerable inflation declines but noted the uneven part of disinflation alongside a resilient labour market.  



BoJ uncertainty, USD continues to benefit  


The veil of uncertainty surrounding the BoJ’s future policy decision is preventing any aggressive movements for the JPY, meanwhile, the USD continues to benefit from optimism regarding US economic growth, which could prompt the Federal Reserve to maintain higher interest rates for an extended period. This expectation is likely to prevent significant downward corrections in the USD/JPY pair, especially with the upcoming release of more economic data later in the week, including the BoJ Core Consumer Price Index (CPI) as well as the US Personal Consumption Expenditures (CPE) Price Index data. 

 



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