Does a USDJPY Fall in 2023?
The Japanese yen had a difficult year last year. Over 2022, the USDJPY rose more than 30%, reaching a high of 150 in October. While expectations of weaker Fed rate rises dragged the pair below the 130 level in early 2023, doubts over the fate of the BOJ's yield control program drew the attention of Japanese assets in the middle of January. What is ahead for Japanese yen traders?
What impact does the BOJ have on the market?
The Bank of Japan is well-known for its cautious and steady monetary policy, which tries to stimulate economic growth while also fueling inflation. The BOJ employs two primary tools: the negative interest rate of -0.1% and yield-curve control, which permits the 10-year government bond to move within a predetermined range to achieve the 0% yield objective.
The Bank of Japan's yield-control policy, which was implemented in 2016, seeks to maintain yields low to boost consumer spending. As a result, inflation should rise. The Bank of Japan indicated in 2018 that the 10-year yield might rise or fall by 0.1% above or below zero. To stimulate market activity, the regulator expanded the band to 0.25% in each direction in March 2021.
In 2022, the BOJ lifted the cap to 0.5% above/below zero and expanded asset purchases in response to increasing pressure on the Bank to raise interest rates. It also increased speculation that the Bank may forsake its long-term interest rate objective. However, the Bank of England made no adjustments to monetary policy on January 18, causing the 10-year bond rate to fall to 0.38%.
In January, the Japanese yen fluctuated due to changes in market sentiment. The USDJPY plummeted over 14% at the start of the month but began to rise when the Bank announced the continuance of its easing monetary policy. Despite this, economists do not expect the Japanese yen will fall in value in the long run.
Factors that might boost the JPY
Many variables might influence the Japanese yen's long-term decline.
First, the central bank may be forced to intervene if inflation reaches 4% in December 2022. According to Bank of America, inflation might rise considerably beyond the market estimate (3% vs. 1.9%).
Another reason for the hawkish policy shift is the expiration of the tenure of BOJ Governor Haruhiko Kuroda. Analysts are concerned that the BOJ will duplicate the Fed's transitional rhetoric and take aggressive actions too late.
If this is correct and the JPY strengthens, the USDJPY may go below the 127 mark. In such a situation, sellers should set their sights on 122.30 and 114.70. After the retest of the 50-day SMA at 133.50, selling pressure may escalate.
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Conclusion
The Japanese yen has suffered as a result of recent monetary policy moves. However, strong inflation and a change in leadership at the Bank of Japan may cause the USDJPY to go below 120.