Has there ever Been a More Critical 12 Hours for the USD/JPY?
- Japanese Yen may strengthen as Bank of Japan to show policy discord
- Positive Japanese economic data shows little effect as traders focus on US Dollar
The Japanese Yen starts a critical week near the middle of its 3-month trading range, but surprises out of the Bank of Japan or US Federal Reserve could quite easily force the long-awaited USD/JPY breakout. Traders look to an especially pivotal 12-hour stretch starting with the highly-anticipated BoJ decision early Wednesday morning GMT and the US Fed later that evening.
The key question for the USD/JPY is straightforward: will either the Japanese central bank or its US counterpart finally break the deadlock and force worthwhile currency volatility?
A majority of analysts expect BoJ Governor Haruhiko Kuroda will announce fresh monetary policy easing in response to persistently low domestic inflation, and failure to do so would likely send the Japanese Yen considerably higher (USD/JPY lower). There is considerable uncertainty, however, in what forms any fresh easing might take and subsequent effects on the Yen exchange rate. Kuroda himself said drastic policy steps could be taken and there remains ample scope for interest rate cuts as well as unconventional types of policy easing. It is of course important to note policy rates are already negative and the bank’s so-called Quantitative and Qualitative Easing (QQE) policy is fast running out of securities to buy.
Many expect the Bank of Japan could cut short-term rates further into negative territory and do a so-called “reverse twist†where they focus on buying short-term debt in order to steepen the JPY yield curve. A flat yield curve—where short-term and long-term interest rates are the same—hurt bank profits and imply investors see little scope for higher growth and interest rates in the future. In other words, a steeper yield curve is better. But will artificial steepening prove beneficial? This is a much more difficult question to answer, and how the Japanese Yen might respond is even less clear.
