On Wednesday, the Bank of Japan left its ultra-easing policy unchanged, sparking heavy speculation that it could be prompting the monetary policy divergence between the Bank of Japan (BoJ) and the Federal Reserve while defying market expectations it would phase out its massive stimulus program.
In the face of uncertainties worldwide, the Bank of Japan (BoJ) claimed that it is crucial to maintain a flexible policy for absorbing external shocks while supporting the Japanese economy. In addition, the central bank vowed to continue with a large-scale bond purchasing program and increase its flexibility if required. Recently, the BoJ has been forced to make significant bond purchases to stabilize the government yield, buying ¥9.5trn Yen on the 12th and 13th of January.
Nonetheless, some market participants still do not rule out the possibility of the policy-shifting from the Bank of Japan (BoJ) following the inflation rate in the Japan region hitting a 40-year high, and focus has now shifted to the appointment of the new BoJ governor.
The Japanese yen tumbled significantly yesterday as the widening interest rate differential between US and Japan’s 10-year government bond yield. Nonetheless, the overall long-term trend for USD/JPY remains bearish. Economists expect global funds will continue to pressure the Bank of Japan by selling its bonds until it makes amendments and tightens the monetary policy. In long-term investment horizons, analysts are still expecting a strong Japanese Yen in 2023, especially in the face of a rising inflation environment following China’s reopening of their economy.
On the other hand, the US Dollar continues to hover at a seven-month low as more indications point toward smaller rate hikes. US 10-year Treasury yields dipped into four-month low over the backdrop against the downbeat economic data. According to the US Bureau of Labor Statistics, the US Producer Price Index (PPI) for last month notched significantly from the previous reading of 0.20% to -0.50%, missing the market forecast of -0.10%. Meanwhile, US Retail Sales came in at -1.10%, which also fared worse than expectations of -0.80%.
Movements in USD/JPY will be highly volatile in the coming days, and traders are advised to be extra vigilant about risk management. Keep an eye out for the results of the monetary statement from the Fed and BoJ – which will give hints for the future direction of interest rate differential between the two currencies. Meanwhile, US Initial Jobless Claims, due to be released on 19 January 2023, at 15:30 (GMT+2) will be another crucial signal for the traders to justify the economic prospect in the United States.
As a friendly reminder, keep an eye on market changes, control your positions, and manage your risk well.