Japanese Yen Outlook: USD/JPY Probes 135 as BOJ Implements YCC

Japanese Yen Outlook: USD/JPY Probes 135 As BOJ Implements YCC
Japanese Yen Outlook: USD/JPY Probes 135 as BOJ Implements YCC
The yen rallied against the US dollar last week as traders expected the Bank of Japan to tighten its ultra-loose monetary policy at this month’s meeting. In its quarterly report, the BOJ kept the benchmark rate and its yield-curve control policy unchanged but hinted that a change might be needed in the near future.

Yen’s Rebound From Surging US CPI Expected to Decrease This Year
The Japanese yen has surged against the greenback in recent weeks after weaker-than-expected US inflation data bolstered hopes that the Federal Reserve will tighten its interest-rate policy less aggressively this year. This has pushed the yen back up to a level last seen in mid-December, when it hit its highest levels in more than two months, on the back of expectations the Fed would be hesitant to tighten.

Inflation Risk for the Yen This Year
The Japan economy is still vulnerable to higher global energy prices and disruptions in supply chains from war in Russia and Ukraine. In particular, a rise in energy costs will stoke inflationary pressures and put more pressure on the Japanese consumer.

Japan’s economy is also likely to feel the impact of increased global trade and financial tensions this year. The conflict in Russia and Ukraine could affect exports, weighing on growth. In addition, rising global oil prices will stoke inflationary pressures in other major economies, boosting imports.

This combination of factors is set to exert greater depreciation pressure on the Japanese yen this year than it did in 2021, according to Goldman Sachs’ latest forecast. The bank predicts the yen will lose more than 6% of its value against the US dollar this year and reach 125 yen per US dollar by the end of the year.

Despite the yen’s weakness, the Japanese economy remains on track to grow 2.1% in 2021. However, the country faces several challenges that are expected to reduce the pace of economic growth, including high input costs and an increasingly fragile current-account surplus.

These issues have prompted the Japanese government to begin emergency bond-buying. The BOJ has bought a total of $80 billion worth of 10-year government bonds since the start of 2021.

The yen will remain weak this year, especially as the Russia-Ukraine conflict intensifies and the US Federal Reserve hikes interest rates. The combination of these factors is likely to depress Japanese economic growth, causing the currency to continue to fall.

It is unlikely that the yen will gain much ground over the next few months, but it is not impossible for the currency to strengthen gradually over the course of the year as the conflict in Russia and Ukraine eases and economic growth improves in other major economies. The yen’s decline will be limited, though, as the BOJ continues to maintain its ultra-loose monetary policy.

The BoJ is not expected to make any significant changes to its monetary policy settings in December, which means the yen will continue to find support against the dollar. Moreover, the BoJ’s YCC will remain intact this year as well, with the central bank allowing the yield on 10-year government bonds to breach its upper limit of 0.5%. The bank’s YCC is an important policy tool, ensuring that the interest rate on 10-year government bonds does not exceed 50 basis points above its benchmark rate.