New Governor in town
The Japanese Yen has attracted a lot of economic commentary over the past few months. The Yen had been losing significant ground on markets as the Bank of Japan clung to ultra-loose monetary policy. Even in an environment of rising global inflation, the central bank kept rates low and kept the monetary financing taps on. If you recall, the Bank of Japan not only held record low benchmark rates, but had also employed a relatively new tool of yield curve control. This ensured that virtually no corner of the fixed income market could produce rising yields and increase the cost of borrowing beyond the central bank’s intention. In the BoJ’s defence, inflationary pressures domestically were limited by global standards.
Whilst double digit inflation was becoming commonplace in many developed markets, Japan’s inflation rate did not see such a sharp spike. Instead, a gradually rising price level has characterised economic conditions in Japan over the past year. The expectation had been that with a handover of governorship at the BoJ, policy adjustment might be in store and rates may finally be allowed to rise. This week will see the new Governor Ueda provide the latest monetary policy decision for his bank and country. The decision on Friday will test market’s conviction behind the need for monetary adjustment in Japan and their guess that the change of policy maker at the helm will herald in that change.
There are some risks to this theory. Firstly, there is a lot of data in Japan due for release ahead of the decision. If that data, concerning high salience statistics including GDP and inflation itself, paints a picture of a residing inflationary pressure in Japan it may fuel a continuance of dovish monetary policy. Implied volatility across the entire FX market has been falling with lower realised volatilities. This calm (for now) may also limit the need to adjust policy for fear of further volatility and value losses within the Japanese Yen from the perspective of the central bank. Many analysts are also warning that the new Governor may wait until the next policy meeting in April before rocking the boat. However, any hint towards an adjustment in policy rates during his tenure could change the Yen’s course significantly.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Morning Brief – British Pound
Humphrey Percy
Wed 8 Mar 2023
British Pound In itself not really a story but when a Member of the Bank of England’s Monetary Policy Committee opines on the UK currency, the market reacts. Yesterday it was the statement that if investors had not fully priced in the likelihood of further interest rate rises from both the Federal Reserve and the […]
Morning Brief – Bank of England
Humphrey Percy
Wed 22 Mar 2023
Bank of England The UK’s Monetary Policy Committee will pronounce tomorrow and uppermost in their minds will be the UK Inflation release which came out first thing this morning. Because it is higher at 10.4% rather than significantly lower than last month’s annualised 10.1%, not only does the Bank of England have more egg on […]
Morning Brief – Big Week
Humphrey Percy
Mon 20 Mar 2023
Big Week With news about the arranged marriage of Credit Suisse to UBS announced on Sunday night following the bank’s CHF 50 billion liquidity line injection last week, repercussions from the failures of SVB and Signature Bank and fears for First Republic Bank despite a USD 30 billion multi bank rescue, expectations for a 50 […]
