Japanese Yen Weekly Forecast: Could LDP Victory and BOJ Inaction Deepen Yen Weakness?
By James Hyerczyk | Originally Published on FX Empire
The Japanese yen continues to hover near decades-low levels against the US dollar as a combination of monetary policy divergence and domestic political developments weigh on the currency. While the US Federal Reserve has maintained a hawkish tone on interest rates, the Bank of Japan (BOJ) remains cautious about tightening policy, creating a stark contrast that undermines yen strength.
This week, all eyes will focus on two key events likely to influence yen performance:
– The outcome of the Liberal Democratic Party’s (LDP) leadership election
– Any hints from the Bank of Japan ahead of its late July policy meeting
With political uncertainty potentially resolved after Prime Minister Fumio Kishida’s expected victory in the LDP vote, and the BOJ still hesitant to shift its accommodative stance, the yen is set for another volatile week.
Backdrop: Yen Driven by Yield Differentials
The primary factor eroding yen value this year has been Japan’s ultra-loose monetary stance compared to the tightening regime seen in the US and Europe. Bond yield differentials continue to dictate capital flows and are a central theme for forex markets.
– The BOJ has kept its benchmark interest rate at -0.10% and continues to suppress long-term yields with its yield curve control (YCC) policy.
– In contrast, the US Federal Reserve maintains the federal funds rate in the range of 5.25% to 5.50% and has communicated a data-dependent but restrictive policy path, deterring bets on rate cuts.
– This wide interest rate gap feeds into carry trade dynamics, where traders borrow yen to invest in higher-yielding currencies, especially the US dollar.
These conditions create consistent downward pressure on the yen, particularly during periods of relative calm in global equity markets when risk appetite supports carry demand.
Recent Performance: BOJ’s Dovish Persistence
Despite high inflation readings and wage growth in Japan, the BOJ has held the view that the economy is not yet ready for a full policy normalization. Core inflation has averaged above the central bank’s 2% target for well over a year, and major companies are raising wages for the first time in decades. But the BOJ remains cautious, awaiting solid signs of sustainable, demand-driven inflation.
– In the June meeting, the BOJ opted to leave interest rates unchanged and expressed concern about the growth outlook.
– Officials also showed hesitancy in reducing the pace of Japanese Government Bond (JGB) purchases, indicating that the exit from ultra-easy policy will be gradual at best.
– BOJ Governor Kazuo Ueda reaffirmed the central bank’s desire to avoid any “premature” tightening that could stymie Japan’s fragile recovery.
This reluctance to shift from dovish policy continues to damage yen sentiment, encouraging traders to remain short on the Japanese currency.
Politics in the Spotlight: LDP Election’s Role
Prime Minister Fumio Kishida is set to secure re-election as leader of Japan’s ruling Liberal Democratic Party, which would solidify his tenure until 2025. While not as market moving as a national election, Kishida’s reelection carries importance for policies affecting the economy and BOJ independence.
– Kishida has backed the BOJ’s dovish approach and outsourced monetary decision-making to Governor Ueda, ensuring minimal political interference in central bank decisions.
– Markets see stability in Kishida’s government as a signal that no drastic fiscal or monetary reforms will emerge in the near term.
– A more interventionist or populist contender could have rattled markets by suggesting changes to the BOJ mandate or pressuring the institution to address currency depreciation.
Given this outcome, the political environment remains favorable for continued BOJ dovishness, which indirectly suggests more downside risk for the yen.
USD/JPY Outlook: 160 Level Remains in Sight
As of the latest
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