The Bank of Japan's (BoJ) tight-fisted control over the Japanese yen (JPY) has been a major factor in its devaluation against other currencies in recent years. As a result, many investors and traders have been paying close attention to the JPY in order to gauge its future value. Interested in keeping up to date with Japanese yen news and forecast? This article will cover everything you'll need to know with regard to the Japanese yen and the scenarios where it will continue to weaken or strengthen in the long run.
What Is the Japanese Yen?
The Japanese yen is the official currency of Japan and is widely perceived as the third reserve currency, after the US dollar and Euro. According to global volume numbers, the yen is the third most traded currency in the foreign exchange market.
The Yen & Japan's Battle Against Deflation
Before further elaborating, let's first understand the basics of deflation. In a nutshell, deflation refers to a persistent decrease in the general price level of goods and services in an economy. When prices are falling, consumers and businesses tend to delay purchases, which can lead to a spiral of declining economic activity.
The delicate balancing act between boosting economic activity and avoiding deflation has been a multi-decade-long challenge for the BoJ. Inflation has been highly sought after by the BoJ because it believes this will spur economic growth. Unfortunately, Japan has been struggling to achieve this since the Japanese economic bubble burst in the 1990s.
Policy-wise, Japan's main way of battling deflation is through a combination of low-interest rates and monetary easing. The BoJ has kept interest rates near zero and injected large amounts of liquidity into the economy in an attempt to spur borrowing and spending. By keeping the yen weak, exports become more competitive from a price perspective. This can increase demand for Japanese goods and services, boost economic activity and ultimately help combat deflation.
Japan's Economic Roadblocks
Although this has been the game plan for the BoJ, some things haven't gone according to plan. For starters, while Japan does have a trade surplus from its high levels of exports, its weaker yen has also led to higher import costs. As a nation that's highly dependent on foreign energy imports, average prices surged on the producers' end when natural gas prices soared during the Russia-Ukraine conflict.
Additionally, Japan's economic stimulation has been dulled by its ageing population. Culturally, the average Japanese salary worker Without a thriving population, capital-intensive projects like the construction of new houses and factories will face diminishing returns because of the limited uptake. In other words, there are simply not enough locals to stay in these newly built homes and work in these factories.
The Latest Japanese Yen News: April's BoJ Meeting
There's much to be said about the current sentiment of the Japanese yen thanks to the recent Bank of Japan policy meeting. While its policy of low-interest rates and monetary easing has remained unchanged, Governor Ueda’s cautious tone in the press conference has justifiably left Japanese yen traders anxious.
Besides securing a unanimous decision for reiterating yield curve control and purchasing Japanese assets, the BoJ also highlighted the following:
Continuation of Quantitative and Qualitative Monetary Easing
The BoJ will stick with expanding the monetary base until CPI levels exceed the targeted 2%.
A Broad-Perspective monetary Policy Review
The BoJ plans to review the various monetary easing measures that have stayed the same since the Japanese economy first fell into deflation in the late 1990s.
Overall, the announcement had a mixed effect on the Japanese yen forecast. While it initially weakened in response to the news, the yen quickly regained strength as investors weighed the potential benefits and risks of the BoJ's policy.
What Factors Affect the Japanese Yen?
Even though there are a broad number of factors that impact the Japanese yen, these are the few that are worth highlighting:
Economic Indicators
The strength of a country's currency largely reflects the state of its economy. The Japanese economy has been in a state of stagnation for many years, with low GDP growth, low inflation and a negative interest rate policy. These indicators have contributed to the yen's weakness, as investors seek higher returns elsewhere.
Global Economy
The global economy also plays a significant role in the strength of the yen. A weak global economy typically strengthens the yen, as it is seen as a safe haven currency. However a strong global economy weakens the yen, as investors look to higher-yielding currencies.
Government Policy
The Japanese government's policy has also played a role in the yen's weakness. The Bank of Japan has been pursuing a monetary policy of quantitative easing for many years, which has led to a significant increase in the money supply. This increase in the money supply has led to inflation, which in turn has weakened the yen.
Japan’s Balance of Trade
Another factor affecting the yen's weakness is the country's trade deficit. Japan is a net importer of goods, which means that it imports more than it exports. This has led to a large trade deficit, which has put pressure on the yen. This is because the yen is sold for foreign currencies to facilitate trade with other international sellers.
Will the Yen Continue to Weaken?
Political Factors
Political factors could also play a role in the yen's strength or weakness. Japan's relationship with China and the United States evidently affects the yen's value and any sign of political animosity or dealings will directly impact demand for the yen. Similarly, any conflict between the United States and China could cause investors to seek other reserve currencies as safe-haven assets, which would strengthen the yen.
Macroeconomic Factors
With the upcoming FOMC meeting minutes, all eyes will be on Jerome Powell as this may potentially be the last interest rate hike before the hotly anticipated Fed pivot. As the federal funds rate positively correlates with the strength of the US dollar, Japanese yen traders will certainly want to keep an eye out for this announcement as it'll heavily impact the odds of the yen weakening or strengthening in the long-run.
Technical Analysis
Source: TradingView as of 29 August 2023
On the technical analysis side of things, USD/JPY looks to be on an upward trend thanks to the spiralling value of the Japanese Yen. The USD/JPY pair has been in an uptrend for several years, having made higher highs and higher lows as marked by the upward trendline. Since rebounding off the demand zone marked above, USD/JPY seems to be heading higher and following the ascending triangle pattern. As of 29th August 2023, USDJPY seems to be on the verge of breaking through the supply zone with a range of 145 to 147. During the recent BoJ meeting, Governor Kazuo Ueda pledged to sustain ultra-low interest rates as underlying inflation still remains below the BoJ's target. The further execution of the aforementioned plan might catalyse an upward movement above the existing supply zone shown above.
Short-Term & Long-Term Outlook for Japanese Yen
Based on the information listed above and the latest Japanese yen news from the BoJ, it's likely that the yen will weaken in the short run. This is because of the BoJ's commitment to monetary easing, yield curve control and purchasing of assets like corporate bonds and exchange-traded funds.
However, in the long run, it's key to take into account the BoJ's policy review as they might change their stance after reviewing their monetary policy. This can result in a sudden pivot strengthening of the yen as the BoJ tries to keep inflation under control if it doesn't yield the desired amount of economic growth and stimulus.
The Bottom Line For Our Japanese Yen Forecast
The weakening trend of the Japanese yen is likely to continue, based on the information presented by the BoJ, economic indicators and technical analysis. However, this could all change with the potential BoJ policy change. It's ultimately key for yen traders to stay up to date on these factors to make informed decisions about trading the yen.
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