Title: Japanese Yen Extends Losses Amid Expectations of Continued Monetary Policy Easing
Original article by Equiti Group (source: https://www.equiti.com/sc-en/news/trade-reviews/japanese-yen-continues-to-weaken-on-expansionary-expectations/)
The Japanese yen remains under considerable pressure this week, extending its ongoing downtrend against major global currencies. Investors and market participants are increasingly betting on the likelihood that Japan’s central bank, the Bank of Japan (BoJ), will maintain its historically loose monetary policy. The expectation has left the yen at multi-decade lows despite various signals from the BoJ suggesting it is monitoring the situation closely.
This persistent weakness in the yen reflects the divergence between Japan’s monetary policy stance and that of several other major central banks, particularly the US Federal Reserve, which remains relatively hawkish in tone. The resultant yield gap has intensified capital flows out of Japanese assets, further exacerbating yen depreciation.
Key Developments Influencing Yen Movement
Several key factors continue to shape the trajectory of the Japanese yen. These include monetary policy expectations, inflation data, interest rate differentials, central bank interventions, and broader macroeconomic developments.
Highlights of the current scenario include:
– The consensus remains that the BoJ will remain committed to its accommodative monetary policy for now, supporting economic recovery and encouraging inflation.
– In contrast, the Federal Reserve has maintained its hawkish bias, keeping interest rates elevated and signaling that rate cuts are not imminent unless inflation pressures ease significantly.
– The widening interest rate differential between the US and Japan has increased demand for higher-yielding assets, particularly the US dollar, leading to renewed selling pressure on the yen.
– Market watchers are carefully monitoring BoJ officials’ recent statements about potential currency depreciation and the impact of weak currency levels on the broader economy, especially in terms of import prices.
– Japanese exporters have mostly benefited from a weaker yen, which makes their goods more competitive on global markets. Conversely, the cost of imports, particularly oil and food, continues to rise, contributing to domestic inflation.
Overview of the Current USD/JPY Trend
The USD/JPY currency pair has experienced a notable bullish trend throughout the year. Currently, the pair is trading in the vicinity of 157.00, levels not seen since the late 1990s. Traders are closely watching this psychological threshold, which could attract verbal or direct intervention from Japanese policymakers.
Support for the dollar has remained robust due to:
– Strong performance in US macroeconomic data, particularly the labor market and inflation metrics.
– The Federal Reserve’s policy stance, which has largely dismissed expectations for early or aggressive rate cuts in 2024.
– Rising US Treasury yields, which continue to draw foreign capital flows into dollar-denominated assets.
Technically, the chart structure suggests solid support for the USD/JPY pair at levels around 155.50 and 154.00, while key resistance lies near the 157.50-158.00 range. Traders are also gauging whether official intervention from Japanese authorities may occur in the case of sharp speculative movements.
Divergent Central Bank Approaches
One of the clearest drivers of the yen’s depreciation is the stark contrast in policy direction between the BoJ and other global central banks.
Bank of Japan’s Policy Stance:
– The BoJ continues to implement yield curve control (YCC) measures, capping yields on long-term Japanese government bonds (JGBs) around 1 percent.
– Overnight interest rates remain just above zero following a minor rate hike in early 2024, the first in 17 years.
– Despite this move, the BoJ insists that monetary policy will remain accommodative for an extended period due to fragile economic recovery and modest wage growth.
– Inflation in Japan remains above the central bank’s 2 percent target, but the BoJ has treated this rise with caution, interpreting much of the increase as cost-push inflation rather than demand-pull.
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