Japanese Yen Outlook: USD/JPY Bid as Debt Ceiling Fears Dissipate

Japanese Yen Outlook: USD/JPY Bid as Debt Ceiling Fears Dissipate In the current quarter, we saw an unprecedented drop in yen, as a result of two factors – (a) the global and (b) the local turbulence. The first factor, the global, is related to the protracted economic crises in the USA, Europe and Asia-Pacific countries. The second factor, the local is related to the local turbulence which started in late December. Japan is a major economic center and has one of the strongest economy in the world. With such a massive economy, any shock to the Japanese market will affect negatively the Japanese economy.
Recently, the Bank of Japan (BOJ) injected USD 200 billion into the Japanese economy via official bank notes. This move surprised the market and led to a USD strengthening versus major currencies on the over-the-counter market. However, the over-the-counter market does not incorporate all the relevant information including the USD/JPY bid as debt ceiling risks. Hence, one should not expect an immediate depreciation in the Japanese yen when the markets are volatile.
On the other hand, looking at the long-term trend, a strong USD/ JPY bid usually indicates that the economy is on a strong ground. Since this particular currency pair is generally a leading worldwide currency pair, any weakening of the Japanese yen against the USD will have a significant global impact. For instance, a 20% fall in the Japanese yen would mean US economic growth of three percent or less.
Looking at the Japanese Yen Outlook: USD/JPY bid as debt ceiling risk The Japanese economy is showing signs of slowing down following the BOJ’s accommodative measures implemented in the recent past. In addition, revisions to past and present economic data have resulted in widening the gap between surplus and deficit in the current account. Moreover, the BoJ has yet to announce any easing of monetary policy since it considers the slowing economy as a measure to correct the balance of trade. It is widely speculated that the BoJ may delay its rate hike until it is more confident about the impact of its actions on the economy. In any case, the BoJ has lowered its official rate and is expected to do so again in April. Given these factors, there is a need for consistent USD/JPY strength which is supported by fundamental factors like low rates, current accounts surplus and growing inflation.
The Japanese Yen Outlook: USD/JPY bid as debt ceiling risk As mentioned above, the BoJ is likely to release some easing measures at a later date but for now, it is unlikely to resort to a rate cut. The BoJ is watching the situation very closely and is watching the market closely for any sign of weakening of the Japanese economy. The Japanese economy has been hurt by the global recession but the recent slowdown was led by the weakness of the Japanese Yen which made exports cost more than imports. The BoJ may respond by reducing the interest rate, tighten the money market or increase the base rate if the current indicators are enough to weaken the Japanese economy further.
The BoJ may move to take control of the market by hiking the interest rates and this will cause more selling pressure on the USD/JPY. This means that traders should pay close attention to the BoJ’s actions in the forex trading world as this will provide them with an indicator of when the BoJ will move to tighten the noose on the market or when they will start easing monetary policy. The BoJ has two main policies that they can choose to follow, one is to keep rates on hold and the other is to cut back on the purchases of government bonds to help pump more stimulus into the economy. The Japanese Yen Outlook provides us with an excellent indication of how the Forex market may evolve over time.

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