The USDJPY currency pair was trading up over 98 pips as the US dollar rallied against the Japanese yen, driven by the Bank of Japan’s dovish interest rate decision. The BoJ is the only leading central bank that has maintained negative rates by keeping rates stable at -0.10%.
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The pair initially fell as the yen rallied higher on expectations that the Bank of Japan would outline a hawkish view of monetary policy, but this was not the case. The central bank did not change its controversial yield curve control (YCC), which it left intact at +- 0.5%.
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Investor sentiment later switched to extreme bearishness as the US dollar rallied higher against the Japanese yen. The initial decline in the currency pair ended after the BoJ’s monetary policy decision was announced, and it kept the YCC intact.
Investors were disappointed by the BoJ’s dovish outlook on inflation despite the latest data indicating that inflation was rising in Tokyo and the rest of Japan. BOJ Governor Kazuo Ueda has said the central bank expects inflation to slow below 2% toward the middle of the current fiscal year.
However, the latest data showed that Tokyo’s core inflation rose 3.0% in July 2023 compared to last year, beating analysts’ consensus estimates of 2.9%. Japan’s nationwide core CPI rose 3.3% in June from 3.2% in May. Japan’s double-core inflation slowed to 4.2% year-on-year from 4.3% in May.
The yen’s future looks weak, given the significant interest rate differential between Japan and the rest of the world, but the country’s macro dynamics support the BoJ’s easy monetary policies. The question remains, will the BoJ ever change its monetary policy stance?
The short answer to the above question is that the BoJ will likely change its policies once Japanese inflation skyrockets to new highs that force the central bank to hike rates. The BoJ has constantly reiterated that local Japanese demand remained weak, unlike in other countries.
The inflation seen in Japan is mainly from the country’s imports, so raising rates may not solve inflation. The BoJ hopes to stimulate demand via easy money policies.
*This is not investment advice.
The USDJPY price chart.
The USDJPY currency pair was trading up over 98.8 pips (0.71%) as the US dollar rallied against the Japanese yen.
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