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 Tuesday 31 May 2016

PM Bulletin: BOJ and the yen

 

 
On 29th January this year the Bank of Japan (BOJ) adopted negative interest rates. The move took investors by surprise as just a week previously BOJ Governor Haruhiko Kuroda had told policymakers such a move was not being considered. The BOJ decided that a negative interest rate policy was, at that time, preferable to adding to its programme of quantitative and qualitative easing (QQE).

The central bank was anxious to weaken the yen. This negative interest rate policy (NIRP) should have made the currency less attractive for investors. This, it was thought, should boost inflation as a weaker yen makes imports more expensive. It should also make Japanese exports more competitive and help to encourage wage growth which should feed through to higher personal consumption. The yen fell initially while the Nikkei rallied. However, the currency soon reversed direction. Just ten days later the USDJPY was trading below 111.00 representing a rise of over 8% for the yen against the US dollar. Clearly investors felt that the BOJ was running out of ammunition and resorting to desperate measures.

Then one month ago the yen rallied sharply again following the Bank of Japan’s (BOJ) decision to hold back from announcing further monetary stimulus. Once again, the BOJ’s decision took many investors by surprise. Earthquakes in mid-April and the yen’s rally since the adoption of NIRP had been considered the perfect cover for yet another round of intervention. The Japanese yen flew higher and the USDJPY broke below 106.00 to hit its lowest level since October 2014. These two big moves in the USDJPY are shown below:
     
  PM Bulletin
  
   

As we can see, the yen has lost ground since the beginning of May. But this latest move has more to do with the expectation the US Federal Reserve will raise rates over the summer rather than any confidence in Japan’s policymakers to intervene successfully and bring about the inflation and economic growth they are so desperate to achieve. Bear in mind that the BOJ has been running an unprecedented and open-ended QQE programme since October 2014. Also, Japan has been engaged in quantitative easing since 2001.

The next opportunity for the BOJ to provide further stimulus comes in two weeks’ time. It’s fair to say that investors expect action from the central bank. After all, BOJ Governor Haruhiko Kuroda insisted back in April that he saw no limits to monetary stimulus. On top of that, over the weekend Japanese Prime Minister Shinzo Abe told members of the G7 to expect more.


The Fed’s own rate decision will follow the BOJ’s on 15th June. Before then we have a clutch of major events which will also impact on the USDJPY currency pair, including US Non-Farm Payrolls this Friday. But overnight we have Manufacturing and Non-Manufacturing PMIs from China. And tomorrow morning Mr Abe is scheduled to hold a press conference. The speculation is that he may be set to postpone next year’s sales tax or even announce a snap election.
  
Disclaimer:
  

Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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