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Last week, the Bank of Japan predictably kept its short-term interest rate at 0.0 – 0.1%. The latest estimates suggest that inflation will remain around 2% for the next three years.
Although the BOJ hinted at possible rate hikes in the future, it refrained from specifying the monthly government bond purchases to which it had committed.
Still, the Japanese currency plunged to its lowest level in 34 years on Monday, briefly touching 160 against the dollar.
The yen lost more than 15% of its value against the dollar last year. This year alone, the yen has become one of the worst-performing major currencies, depreciating by more than 9% against the dollar.
It should be noted that the main driver of this devaluation of the Japanese currency lies in the stark contrast between the Bank of Japan’s ultra-loose monetary policy and the Federal Reserve’s hawkish stance.
What lies ahead?
The Japanese currency rose sharply once it crossed the psychological threshold of 160 yen to the dollar. Speculation suggests that the regulator intervened in the market. However, as usual, the Japanese Ministry of Finance remained silent on the matter.
To reverse this trend, substantial measures may be required. This could involve spending more than $60 billion, the amount allocated by the regulator for monetary interventions in September and October 2022.
As for the likelihood of further monetary tightening, especially a 200 basis point rate hike, the Bank of Japan may be constrained by its high debt levels. Such a move could lead not only to the bankruptcy of companies but also of the government.
And if the fall in the yen persists?
On the one hand, this puts pressure on domestic consumption in Japan, eroding purchasing power. On the other hand, it could boost exports and overseas profits of Japanese companies and banks operating globally.
As for clues as to where the USDJPY pair could go next, it is crucial to follow macroeconomic updates along with technical analysis, including support and resistance levels. At the very least, it will help guide market sentiment.
