Market Overview

The Japanese Yen is declining against the U.S. Dollar, as the USD/JPY rose from 130.6 lows on December 20 to 133 on December 27. The pair is rising despite the Dollar being weaker against most of the other major currencies. The U.S. Dollar index fell from 104.4 to 103.6 points over the same period.

So why is this happening and what are real reasons behind the battering of the Yen?

The Bank of Japan (BoJ) greatly surprised markets with its controversial decision on December 20 when it left its interest rates stable. The BoJ, led by Governor Haruhiko Kuroda, has been traditionally known over the last decade for its ultra-soft monetary policy. This kind of monetary policy stand is vital for Japan to move away from negative economic development as the country’s GDP contracted by 0.2% in the Q3 2022. On the other hand,  inflation in Japan is rather low at 3.7%, way below levels of many other developed countries. Such a situation creates opportunities for a softer monetary policy which weakens the Yen but supports production and exports.

Even though the BoJ did leave interest rates untouched on December 20 it adjusted its yield curve control to 0.5% from the previous 0.25%, which may mean a possible strengthening of the Yen. This could be considered to be a minor but firm step away from monetary easing. This decision, however, shook the market and overshadowed the other important decision by the BoJ to increase debt purchases from the market from 7.3 trillion Yen to 9.0 trillion. That will eventually mean more printing of money by BoJ. So, in fact, the Japanese monetary authorities continue to move towards monetary easing, not tightening. But investors translated the outcome of the bank’s latest meeting as monetary tightening and the following of actions currently being taken by other major central banks.

The Yen rose sharply to the Dollar during the last week as the USD/JPY fell from 137 to 130-131, which is five-month lows. All in all, the market came to the conclusion that its response to the BoJ’s decisions was too exaggerated and emotional. So, the pair is beginning to roll back but it may extend to the upside amid the upward trend that started in the autumn of 2021, in line with the monetary tightening being performed by the U.S. Federal Reserve (Fed). Technically, the recent drop of the USD/JPY from its highs at 152 is seen to be a strong correction to the rally that started on February 22 this year at 114.4.

The Dollar is strengthened by its weakness and although this may sound like a paradox, the greenback has suffered too much of a fall for a further decline to be considered much of a reality. This is in the contrast to the Fed’s rising interest rates, markets’ exposure to an upcoming recession, and geopolitical risks. These are all the factors that may stimulate the demand for Dollar-denominated safe haven assets and the Dollar itself.

The BoJ, on the other hand, is not inclined to reverse from its monetary soft stance. So, it might be suggested that the Dollar may accelerate to the Japanese currency at an even faster pace. So, the pair may rise to the first technical targets at 134-135, and further up to 138.

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.