Decoding the Digital Forex Changes in the USD/JPY Market
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The forex market is always buzzing with activity, and one currency pair that has been making headlines recently is the USD/JPY.
In recent weeks, the USD/JPY has seen some significant price changes, with the greenback strengthening against the Japanese yen. This trend has been driven by many important factors, like talks surrounding BOJ’s monetary policy, the new governor, and positive economic data out of the US.
So let’s take a closer look at what’s been driving these changes and what they could mean for USD/JPY.
Various factors can influence the prices of stablecoins in the digital forex market, and one crucial consideration is the market trend of the underlying fiat currency. Our blog regularly updates major currency price movements and analyzes the policies and economic factors that drive them.What’s going on with USD/JPY?
After dipping to 127.215 in January 2023, USD/JPY bulls have dominated. The pair has gained more than 5%, as the news surrounding the BOJ’s next governor and the dovish monetary policy affects the JPY.
On the USD end, the hot inflation figures reported by the latest CPI (Consumer Price Index) and the PPI (Producer Price Index) suggest “There’s more work” for the Fed.
BOJ’s Governor talks
On February 14, the Japanese government formally nominated economist Kazuo Ueda to be the next governor of the Bank of Japan. Both chambers must now approve Ueda’s nomination of Japan’s parliament.
The ruling coalition of Prime Minister Fumio Kishida enjoys a majority in both chambers. On February 24, there will most likely be parliamentary hearings.
The BoJ’s unprecedented quantitative easing measures will be gradually phased out by Ueda based on the confidence that Kishida has in Ueda’s monetary policy expertise.
“I decided that Mr. Kazuo Ueda was the best fit since he is an internationally well-known economist with deep financial knowledge of both theory and practice,” Kashida said after nominating Ueda.
In the aftermath of the news, the yen surged against the dollar in anticipation of a shift in monetary policy by the BOJ’s new governor.
Former Treasury Secretary Larry Summers dubbed Ueda Japan’s Ben Bernanke, and he has drawn a lot of attention, with investors wondering what the next governor can bring.
But the new chief faces daunting tasks; to move away from the long-standing ultra-easy monetary policy that has left the BOJ as the only major central bank holding negative interest rates to curb inflation.
What do analysts say?
Many analysts think that Ueda will pivot slowly toward normalization.
Bank of America Global Research anticipates gradual policy adjustment under the central bank’s new leadership rather than a sudden shift.
The Bank of Japan will likely increase interest rates under the leadership of Kazuo Ueda by the end of the fourth quarter, according to Eisuke Sakakibara.
In addition to his strong theoretical knowledge, Ueda is a well-known economist who has connections to the international financial community, according to Tsuyoshi Ueno, a senior economist at NLI Research Institute. This means he might be able to unravel and reorganize the “various confusing parts” of the BOJ’s monetary policy.
Uchida, currently the central bank’s executive director, will play a pivotal role, according to Citi economists Kiichi Murashima and Katsuhiko Aiba.
They said that the monetary policy under the Ueda-Uchida administration would not differ fundamentally from that under the current deputy governor, Masayoshi Amamiya.
What to expect?
“I’ve been an academic for a long time, so I believe it’s important to logically make decisions and to give clear explanations,” Ueda said after his nomination.
If the BOJ announces a full policy review, market investors would expect a change or the ending of the yield curve control policy, which is a crucial element of Kuroda’s (current BOJ governor) easing policy.
This will likely push investors to sell Japanese government bonds, perhaps resulting in a rise in interest rates. It’ll force the BOJ to make purchases to contain interest rates, bloating the central bank’s balance sheet and suffering massive unrealized losses.
Fearing currency instability, the business sector has asked the Bank of Japan not to abandon its ultra-easy monetary policy while urging it to reverse record purchases of Japanese government bonds to keep rates low.
Under severe scrutiny from global investors, Ueda will gradually strive to normalize interest rates. Any blunders by the Bank of Japan, whose efforts to keep interest rates low have resulted in it owning more than half of Japan’s government bond market, might destabilize global markets.
What’s up with the USD?
The dollar is clinging to its recent gains against all major currencies. The continuation of stronger US activity statistics can allow the Fed to remain hawkish.
Hot data
CPI (Consumer price index) data issued on February 14 revealed a 6.4% price increase for various goods and services compared to the previous year, down from 6.5% in December and a 40-year high of 9.1% in June.
On a monthly basis, however, prices grew by 0.5% in January, compared to a 0.1% rise in December. Shelter expenses drove the increase.
The PPI (producer price index) increased by 0.7% in January, above the 0.4% forecast. The increase in the PPI corresponded with a 0.5% increase in the January consumer price index.
The CPI and PPI numbers indicate that inflation may have peaked, but it is not quickly returning to the Fed’s 2% inflation target. This increased 10-year US Treasury rates to a high of 3.929% since November, and subsequently with a drop to 3.822%.
Amidst these plays, the dollar is slowly regaining some ground it lost since late October. DXY has already rebounded around a quarter of the drop.
More tightening?
The Feds’ remarks following the CPI print strengthened the assumption that they will need to continue raising interest rates to confront persistently rising inflation.
Financial markets are making significant changes to the Fed cycle, i.e., markets are paying attention to Fed hawks since US activity and price data are higher than predicted.
What to expect from USD/JPY?
The USD/JPY future depends largely on BOJ and the Fed. If the BOJ can slowly shift its monetary policy, we can see a price drop; however, it will not happen too soon, as many analysts say.
On the other side, the latest CPI data suggest that Fed may take more active action, and the dollar correction can run higher in the first quarter.
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