- BoJ inaction means policy divergence grows larger
- Japan government intervention ineffective
- Dollar rebound amid haven flows
By standing pat on monetary policy despite the recent inflation spike and yen slump, has the Bank of Japan (BoJ) paved the way for USD/JPY to reach 150-plus?
Before discussing the BoJ’s inaction, let’s take a quick look at the daily chart of the USD/JPY, which is on the rise again and undoubtedly raising alarm bells for the Japanese government after their recent attempts to stem the yen’s drop:
Following the latest Japanese government intervention that drove the USD/JPY to almost 145.00, the popular FX pair managed to rebound off its lows on Thursday as the US dollar made a comeback amid haven flows after technology stocks sunk on the back of their poor results. The USD/JPY formed a doji candle on Thursday, before breaking higher in the early hours of Friday’s session.
The reversal means the USD/JPY may have resumed its long-term uptrend after the recent volatility.
The focus for yen traders was on the BoJ, and especially on whether the central bank would deliver a surprise and drop its yield curve control policy. Japan has been importing more and more inflation as foreign goods and services would cost more with the recent upsurge in USD/JPY and other JPY crosses, putting significant pressure on the yen. Yet, the BoJ has once again refused to alter its extra-ordinary loose monetary policy, despite the rest of the world changing theirs to a significantly more contractionary stance—not least the US Federal Reserve, which is set to hike rates by a fourth consecutive 75 basis points next week.
This—the diverging policy stance of Japan with the US (and the rest of the world)—has been the main reason why the USD/JPY and other yen pairs have rallied so sharply. But by relying on government intervention to stem the yen’s decline, this has proved to be quite ineffective so far. Thus, there is no reason for the USD/JPY to head significantly lower under the current macro environment. The path of least resistance is still to the upside.
Barring further government intervention, the USD/JPY could easily revisit and surpass the 150.00 handle again, with an accelerated move now that the BoJ has effectively decided to allow the currency to devalue further.
The USD/JPY has also been helped in part by the dollar’s rebound across the FX space. US bond yields are on the rise along with the greenback, while stock index futures have extended their falls, after Amazon (NASDAQ:AMZN) became the latest tech giant to report poor earnings results. If the stock market sell-off continues today, which is likely in my view, I would imagine this would further put pressure on the dollar, and thus help support the USD/JPY even more.
Disclaimer: The author currently does not own any of the instruments mentioned in this article.