The economy determines the exchange rate. If the economy is strong and inflation is above the target, then rates should be raised. The BoJ is refusing to make a rate hike. It has kept borrowing costs at 0.25%, spurring USDJPY quotes. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The Bank of Japan kept the overnight rate unchanged at 0.25%.
- Kazuo Ueda signaled that the rate would remain at that mark until March.
- Politics may have driven the BoJ’s decision.
- Long positions on the USDJPY pair can be opened on a rebound from 155.45, 155, and 154.5.
Weekly Fundamental Forecast for Yen
Trust is a delicate matter; it is hard-earned, easily lost, and difficult to reestablish. The Bank of Japan is proceeding with caution, disregarding clear signals indicating the necessity to maintain the monetary restriction cycle. At its most recent meeting in 2024, the BoJ decided to keep the overnight rate unchanged at 0.25%, a decision that aligned with investor predictions. However, Kazuo Ueda’s suggestions that new steps towards normalization may be postponed until March led to a swift surge in the USDJPY exchange rate.
When the economy demonstrates robust performance and inflation has risen from 2.3% to 2.7% in November, it seems reasonable to tighten monetary policy. According to the insights of approximately 85% of Bloomberg experts, the present moment is optimal for continuing the monetary restriction cycle. However, Kazuo Ueda has adopted a more cautious stance, preferring to monitor the situation before taking any action. According to him, the Bank of Japan should assess the consequences of Donald Trump’s policies and wage negotiations, and it needs an additional batch of strong data.
Inflation in Japan and Other Countries
Source: Bloomberg.
The Bank of Japan has stated that it is not necessary to wait for the situation to become clearer, but it would be surprising if it did not mention this. The results of the negotiations between unions and employers will be known only by April, and the impact of the new US president’s policies on global markets and economies will only be evident in the second half of 2025. Has the overnight rate stabilized significantly and permanently?
The Bank of Japan’s hesitation to increase the overnight rate could be attributed to a wait-and-see approach, anticipating further yen weakening. However, it is crucial to note that the primary responsibility of a central bank is to manage inflation, not the exchange rate. Concerns about a potential recurrence of the 1989 scenario, when borrowing costs were raised three times in a single year, leading to asset bubbles bursting, are understandable. At the same time, it is important to recognize that the current economic and market environment is distinct.
The gravity of the situation is more pronounced. Following the recent election, in which it lost its majority, the ruling Liberal Democratic Party is attempting to form a coalition with other parties that advocate for maintaining low rates in Japan. Politics, rather than economics, appears to be exerting pressure on the BoJ, making it more susceptible to losing credibility in such a scenario.
Speculators, who previously viewed the yen as a primary currency in the Forex market in early 2024, are now actively divesting it. Net shorts on the yen have hit record levels since July, and further declines may lie ahead.
USDJPY Performance and Speculative Net Positions on Yen
Source: Bloomberg.
Weekly USDJPY Trading Plan
USDJPY bulls have retreated due to the slowdown of the US PCE to 0.1% m/m in November and the Fed’s intention to keep cutting rates. However, bears also should remain vigilant, as the passivity of the Bank of Japan and the return of the Trump trade in early 2025 could prove costly. In light of this, long positions can be opened on a pullback to 155.45, 155, and 154.5, adding them to long trades opened at 150.8.
Price chart of USDJPY in real time mode
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