What information did the Bank of Japan wish to withhold from the public at its September meeting? Was it the extent to which policy is a factor? Despite the acceleration of inflation, the Bank of Japan has indicated its intention to proceed with caution, which presents challenges for the yen. Let’s discuss this topic and make a trading plan for the USDJPY pair.
The article covers the following subjects:
Highlights and key points
- The Bank of Japan is eyeing the Fed and the US economy.
- Slow rate hikes are putting pressure on the yen.
- The election of the Liberal Democratic Party leader is hampering the BoJ.
- The USDJPY pair can be sold on pullbacks to 145, 146.1, and 147.3.
Weekly fundamental forecast for Japanese yen
If the Bank of England ignored the Fed’s intention to do everything possible to combat the cooling of the US labor market, the Bank of Japan chose a different path. The Japanese regulator maintained the overnight rate at 0.25% and indicated that an increase is not imminent. This allowed USDJPY bulls to launch a counterattack. For how long will they benefit from the current situation?
Kazuo Ueda believes that Japan’s economy is developing in line with forecasts, but the increased risk of a hard landing in the US makes the Bank of Japan cautious. It will take some time to confirm the correctness of earlier decisions. The central bank has granted the yen a certain amount of time. As a result of this strengthening, there are indications that inflation is decelerating.
Such rhetoric is at odds with the reality of accelerating consumer prices in Japan in August, from 2.8% to 3%. It may also have political implications. On September 27, elections are scheduled for the leader of the ruling Liberal Democratic Party, who will become the new prime minister. Several candidates have expressed discontent with the yen’s strengthening and have called previous overnight rate hikes a mistake.
Japan’s consumer price index
Source: Bloomberg.
Has the Bank of Japan been subjected to political pressure? This is not the case, but the Bank of Japan is required to consider a number of factors. First and foremost, the deceleration in the US economy is exerting downward pressure on Treasury bond yields and causing the USDJPY pair to decline. Kazuo Ueda and his colleagues are exercising caution, as is the Bank of England. However, Japan and the UK are at different stages of their monetary policy cycles. In contrast to Tokyo’s tightening approach, London is taking steps to loosen its monetary policy.
The British pound benefits from the Bank of England’s cautious approach, while the Japanese yen may face challenges. The overnight rate remains low at 0.25%. Earlier, investors anticipated an increase in October, but after Kazuo Ueda’s comments, expectations shifted to December. This provides an opportunity for traders to adjust their strategies, particularly in light of the growing global risk appetite, which was driven by the Fed’s aggressive start.
Central banks’ interest rates
Source: Bloomberg.
The Bank of Japan’s lack of action may ultimately prove disadvantageous to USDJPY bears. One need only recall the beginning of the year to see how this could play out. Many were betting on a fall in the pair due to differing monetary policies, but in fact, the yen became the main outsider in the foreign exchange market, as the difference in rates remained wide and capital flowed from Asia to North America.
Weekly USDJPY trading plan
The current situation differs from previous instances. The Fed will no longer maintain its current policy of keeping borrowing costs higher for longer due to concerns that this may accelerate inflation. The US central bank is confident in its ability to control inflation and plans to reduce the federal funds rate to at least 4.5% by the end of 2024 and to 3.25% by the end of 2025. Against this backdrop, the USDJPY pair’s downtrend will likely continue, allowing traders to open short trades on pullbacks to 145, 146.1, and 147.3.
Price chart of USDJPY in real time mode
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