The Japanese government does not control the Bank of Japan’s decisions. However, the yen is sensitive to the pace of monetary policy normalization. The USD/JPY pair will also be driven by US labor market statistics. Let’s discuss these topics and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The Bank of Japan will increase rates in December.
- The yen is affected by the pace of normalization.
- The US labor market will provide some clarity.
- Long positions on the USD/JPY pair can be opened with targets of 157 and 158.6 if US employment data is strong.
Weekly Fundamental Forecast for Yen
The Bank of Japan is preparing to raise its overnight rate to its highest level since 1994, at 0.75%, while officials claim that the government should not interfere in monetary policy. Meanwhile, 10-year bond yields have hit an 18-year high of 1.97%. Moreover, Japan is sitting on a mountain of debt, and the higher the rates, the more it has to pay to service that debt. The US experience shows that if the Cabinet expressed dissatisfaction, it could be even worse.
BoJ’s Policy Rate
Source: Bloomberg.
When the overnight rate was last at 0.75%, Japanese debt yields exceeded 3%. Now they are lower, and the need to combat high, sticky inflation is forcing the government to remain silent. Its outrage over the tightening of monetary policy would be perceived by investors as interference in the central bank’s operations. In the US, pressure from the US administration on the Fed is weighing on the dollar. Sanae Takaichi would not want to weaken the yen and further accelerate consumer prices.
The futures market is 90% confident that the Governing Board will tighten monetary policy at its December 19 meeting. All 50 Bloomberg analysts share this view. This is the first time since Kazuo Ueda took office as head of the central bank that such unanimity has been achieved.
Expert Forecasts for BoJ Overnight Rate
Source: Bloomberg.
The key issue for investors is not the rate hike itself, but what Kazuo Ueda will say about its future trajectory. Almost two-thirds of Bloomberg experts predict one monetary tightening measure in six months, while 20% believe that it will occur no more than once a year. Only 2% expect quarterly growth in the overnight rate. Most expect it to end the cycle at 1.25%.
Market Expectations for BoJ Rate
Source: Bloomberg.
The pace of policy normalization is crucial for the USD/JPY pair. If the Bank of Japan continues to proceed slowly toward tightening monetary policy, the yen may initially strengthen but then face long-term pressure due to the carry trade. Conversely, an acceleration of the cycle could make the yen a frontrunner on Forex.
The value of the yen against the US dollar will depend on the pace of the Fed’s monetary expansion. In this regard, US labor market statistics and the subsequent Bank of Japan meeting will dot the i’s and cross the t’s, setting the yen on its path.
Weekly USDJPY Trading Plan
Short positions formed on the USD/JPY pair at the 156.8 level can be maintained and increased only in the event of weak US employment data and hints from Kazuo Ueda about an acceleration in the rate hike cycle. Otherwise, there will be an opportunity to buy the pair with targets of 157 and 158.6.
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
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