The JPY is bouncing back after it lost ground against the USD following the Bank of Japan deciding to leave its monetary policy steady. The decision had come as a surprise to investors who were expecting bigger changes.
The rise in JPY is likely due to two factors:
• Escalating US-China trade tensions
While the U.S. and China were supposed to restart talks to avoid a trade war, the American President is considering an increase to the proposed tariffs’ rate to 25%, up from 10%. In times of global uncertainty, investors often seek safer investments.
• Uptick in the Japanese government bond (JGBs) yields
As the Bank of Japan has allowed yields of the 10-year benchmark to move with more freedom, bond investors seem to be testing this limit. While the 10-year JGB yield is now close to 0.125%, it has reached today its highest level since February 2017 at 0.145%.
This week, Japan signalled that it is in no hurry to start moving its monetary policy towards normalization, especially as the level of inflation in the country is far from the 2% target. The governor of the Bank of Japan acknowledged that the inflation target wouldn’t be reached within the next few years. On Tuesday, the policy markers even lowered their inflation forecasts up to 2020:
• 2018: 1.1%, down from 1.3%
• 2019: 1.5% down from 1.8%
• 2020: 1.6% down from 1.8%.
Despite low interest rates and quantitative easing programs, Japan’s inflation rate has been on the floor for many decades now. As the Bank of Japan is committed to support growth, and target a 2% inflation level, it said that it will keep an ultra loose monetary policy for an “extended period of time”. The weak policy should keep the yen historically weak but it has room to manoeuvre in the short term.
If trade concerns keep investors anxious, the JPY could rise, playing its role of a safe-haven asset. Source: LCG Trader, 2/8/2018
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