Earlier today, USD/JPY traded 0.14 percent higher to 102.09 and remained broadly lower after the market closed. Investors remain cautious on the U.S. economic reports due later today and in the upcoming GBP data of Japan for the second quarter scheduled on the weekend.
At the next monetary policy meeting, the Bank of Japan would conduct a comprehensive assessment of the developments in economic activity and prices and the policy effects since the introduction of Quantitative and Qualitative Monetary Easing (QQE), to reach the price stability target of 2 percent at the earliest possible time.
The gross domestic data would play a vital role in the next policy meeting of the central bank of Japan. Also the BOJ is set to conduct a comprehensive assessment to come up with a plan to achieve the price stability target of 2 percent as soon as possible.
Yen Vs. Greenback
The greenback started the year with a massive downfall, pushing the yen higher
as the market waited for the monetary policy decision of the Federal Reserve at its January meeting. Considering the economic outlook, the Federal maintained the target range for the federal funds rate at 1/4 to 1/2 percent. USD/JPY plunged from 210.94 levels during the first week of January and dropped to 151.00, losing almost 60 points on a monthly basis.
During the same period, the BOJ adopted negative interest rates and signaled for another cut to meet the inflation target of 2 percent in the rest of 2016. The central bank of Japan noted the volatility of global financial market and the decline in crude oil prices and concluded that there was an increasing risk that an improvement in the business confidence of Japanese firms. Further, the BOJ saw the possibility that the conversion of the deflationary mindset might be delayed and the underlying trend in inflation might be negatively affected.
In the second quarter of the year, the greenback recovered as the hope for an April rate hike emerged, however, the central bank was not in a rush to tighten the monetary policy over an apparent slowdown in the U.S. economy. USD/JPY plummeted and supported the appreciation of the yen. The same case happened before the conclusion of Brexit. The global financial market was highly affected and all the market sectors skid. Market participants expected the U.S. central bank to implement the highly awaited June rate hike, but it was postponed due to the economic impact of post-Brexit.
At the moment, most of the analysts saw a probable rate hike either in September or December as the current economic data have been positive. Fed officials have kept the door open for a rate hike, however, the certainty of their decision was still vague. During the previous FOMC meeting in July, the Fed said that near term risks have diminished and there has been improvement in the labor market. This could be the an optimistic indication of a future rate hike.
Strength of the Yen
Meanwhile, as the yen appreciates the imports and exports of Japan tumbled as the exporters are forced to cut prices in Japanese yen alongside with the plunging import prices. During the first half of the year, the exports fell for eight months in a row as the value of merchandise exports plummeted 11.3 percent on an annual basis.
Even the Japanese firms complained in the appreciation of the currency. Most of the firms adjusted their earnings forecasts and a few have released a downbeat earnings report. For instance, the auto sector led by Toyota lost 14.5 percent for the first fiscal year as a strong yen slashed earnings.
Also, the consumer spending in Japan has been weak in light of the tax rate hike and the successive earthquakes which hit the country this year. Although Finance Minister Taro Aso said that he’ll closely watch the currency market, the government has not made any firm decision yet to address the strength of the yen.
Bank of Japan
During the recent July meeting of the BOJ, the bank forecasted that inflation rate may increase at a gradual pace. It is tantamount to say that if the inflation rate goes up, then there could be currency devaluation. If and only if the BOJ gets it right this time around.
The central bank of Japan also doubles the amount of its exchange traded fund purchases to 6 trillion yen as it makes the utmost effort to prevent the uncertainties surrounding overseas economies. As the bank move towards monetary policy easing, it sounds probable that it might lose a lot. However, the profit of the bank is expected to increase in the mid of the quantitative easing and the long term effect of higher rate can save the bank.
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