Outlook for USD/JPY

Upcoming Monetary Policy Statement for the BoJ:

This Friday, October 28, the Bank of Japan has their monetary policy statement. We expect the interest rate to stay unchanged, however Governor Haruhiko Kuroda could warn that recent currency movements will have a negative impact on the nation’s economy. This being said, it is still unlikely that the BOJ changes anything to their monetary policy outlook.

BOJ FX Intervention:

The Yen appreciated against the dollar last Friday due to a potential large-scale FX intervention from the Bank of Japan. From outside sources, it is reported that Tokyo might have sold as much as $30 billion on Friday. This was a carefully constructed intervention as the Bank of Japan was looking to lower the confidence of the dollar bulls as the currency pair broke a significant level of 150. Tokyo has yet to officially confirm this intervention but we will have the intervention statistics by next week.

US Factors:

The current federal funds rate in the US is 3-3.25%. On Friday there was a reaction in the US rates market as a Wall Street Journal article implies the FED was trying to figure out how to portray the message that there may be a slow-down in tightening after the 75bp hike in November. This could potentially put a stop to the dollar bulls but we are still unlikely to be at the peak. The unemployment rate in the US is at 3.5% which is not terrible but the jobs market has yet to undergo the impact from the rising interest rates. This is a good indicator to keep an eye on because once unemployment begins to rise, that is when recession fears could potentially turn into a reality.

Long Term Japan Forecast:

Japan has been fighting to inflate the Yen to become more competitive in global trade and they have surpassed their 2% target. Japan got to the inflation target they were looking for but did it come in the way they wanted it?

Governor Kuroda was hoping to get to 2% inflation by an increase in demand but this was how it played out. The BoJ got their 2% inflation from the rising energy costs from the war in Russia and also from the pandemic. In other words the inflation for the Yen came from supply and not demand. As the currency is inflating, the income per capita has not adjusted yet. The Bank of Japan will not be raising rates in regard to the next few monetary policy meetings but what is to come over the next year? They may be forced to abandon their 0% interest rate approach and slow down the inflationary impact to help the Japanese citizens. A notable word used by the Bank of Japan is that the inflation seen is “transitory”. Could this be another instance where the central bank is keeping the economy confident about their current economic stance but in reality are in trouble if this inflation gets out of hand? The Bank of Japan buys virtually all of their own debt because nobody is interested in a 0% return on their investment. The BoJ will have to change their stance in monetary policy if inflation continues to rise over the next year and the BoJ cannot afford to buy the debt they are creating.

Chuck Kolar