The Japanese Yen continues its upward trend for a second day, significantly influenced by the differing policy stances of the Bank of Japan (BoJ) and the U.S. Federal Reserve (Fed). This surge is largely a result of the positive remarks from BoJ Governor Kazuo Ueda, which have sent the USD/JPY pair on a downward trajectory.
Speculations about the continuation of this trend are fuelled by the policy divergence between the two countries’ central banks. As the Fed hints at scaling back its assertive economic support, the BoJ is affirming its commitment to highly lax monetary policy, a stance that seems to be driving the Yen’s rise while causing the USD/JPY exchange rate to fall.
Beginning with predictions of potential interest rate increases by Governor Ueda, the Yen received additional backing from July’s consistent National Consumer Price Index (CPI) inflation data. This consistency supports the BoJ’s economic forecast, further boosting confidence in Japan’s economic recovery.
The market appears to be reacting favorably to these developments, with possible interest rate increases aligning with Governor Ueda’s predictions. This promises positive economic progress for Japan, reflecting the robustness of the nation’s financial policies and economic resilience.
Concurrently, the U.S. Dollar is weakening, potentially tied to predictions of rate cuts in September 2021. The anticipated decrease in the dollar’s value would require strategic adjustments by investors, possibly shifting towards assets that can withstand the decline.
Diverging stances fuel Yen’s strength
On the other hand, this could make imports more expensive and exports more appealing to foreign buyers.
Federal Reserve officials, including Patrick Harker and Austan Goolsbee, have been advocating for a gentler financial policy, with a focus on employment. Their collective insistence on a more flexible approach to financial matters suggests a shift towards addressing unemployment issues.
However, BoJ Governor Ueda rebutted suggestions of selling long-term Japanese government bonds (JGBs) to adjust interest rates. Instead, he proposed a small increase in rates, asserting that reduced JGB purchases would minimally affect the balance sheet.
In July, Japan’s National Consumer Price Index increased by 2.8% year-on-year, the highest since February. The rising dominance of Japan’s financial market is suggestive of adaptability to the changing international dynamics. On the other hand, the U.S. Federal Reserve is considering potential cuts to the federal benchmark rate in September if inflation continues to decrease.
Against this backdrop, the USD/JPY pair is currently trading at around 143.90, with indicators suggesting a probable continuation of this bearish trend. The Yen has also emerged as a strong currency against the New Zealand Dollar.
Despite these developments, predictions are merely speculative and subject to change based on the actual unfolding economic and policy dymanics in Japan and the United States.
