In the context of monetary policy divergence, both the direction and the speed of rate changes are crucial factors. The Bank of Japan’s hesitant stance on rate hikes will likely harm the yen. Let’s discuss this topic and make a trading plan for the USDJPY pair.
The article covers the following subjects:
Major Takeaways
- The Bank of Japan’s rate hike to 0.5% was expected.
- The lack of signals from Kazuo Ueda drove the yen down.
- Tariffs and a Fed pause are the main drivers for USDJPY quotes.
- A rebound from 154.3 and 153 is a reason to close short trades and open long ones.
Weekly Fundamental Forecast for Yen
The Bank of Japan has finally raised the overnight rate to 0.5%, its highest level in 17 years, due to strong wage growth and inflation anchored above 2%. In contrast to the July monetary tightening, which triggered turmoil in financial markets, the BoJ took a more cautious approach in January, issuing advance warnings of a rate hike. Against this backdrop, the USDJPY pair displayed a relatively subdued reaction.
Prior to the BoJ meeting, Japanese inflation accelerated from 2.7% to 3%, which likely influenced the BoJ’s decision. The overnight rate was raised by eight votes to one. Kazuo Ueda noted that the economic situation was developing in line with BoJ forecasts, the external background had stabilized, and further decisions would be data-driven.
Japan’s Inflation Rate
Source: Bloomberg.
Despite the tightening of monetary policy, the yen failed to post significant gains. Market expectations were aligned with the anticipated outcome, as evidenced by the derivatives market’s pricing and 75% of the experts polled by Bloomberg. Meanwhile, Kazuo Ueda did not provide any indication regarding future increases in borrowing costs, leading to significant volatility in the USDJPY exchange rate.
Rabobank anticipates that expectations of a sustained normalization cycle will bolster the yen, projecting a decline to ¥145 over the next 12 months. Meanwhile, BNY forecasts an overnight rate increase as early as May, contingent on the resolution of wage negotiations. Goldman Sachs suggests that the BoJ will increase the rate every six months, elevating it to 1.5%. This aligns with Kazuo Ueda’s assertion of a neutral rate within the 1–2.5% range.
The current scenario resembles the summer of 2024, when there was significant optimism among USDJPY bears following the unanticipated tightening of monetary policy. However, investors gradually realized that both direction and speed are crucial factors. The Bank of Japan’s slow pace of policy tightening contributes to wide rate differentials, allowing traders to use the yen as a funding currency in carry trade transactions.
Major Central Banks’ Interest Rates
Source: Bloomberg.
The Bank of Japan’s gradual approach to normalization is a positive factor for the USDJPY exchange rate. The focus has shifted to the US, its tariffs, and a Fed pause. The potential for accelerating inflation could allow the Fed to sit on the fence for an extended period, which would support a bullish outlook for the US dollar against the Japanese yen.
Weekly USDJPY Trading Plan
The overnight rate hike allowed traders to open short trades on the USDJPY pair. However, the strategy of switching from short positions to long ones will be relevant once the pair rebounds from the support levels of 154.3 and 153.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
