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Is the Japanese yen about to reclaim its haven-asset status?

By Paul Reid

20 December 2023

3029 BoJ
JPY was once a haven asset but became a blackhole that traders now step around. But all that might be about to change.

In January 2021, JPY started a fall that would take it to a very weak 151 against USD. What was once a haven asset became a blackhole that traders stepped around. But all that might be about to change.

The Bank of Japan is now actively scripting a new chapter in the country's financial story. After years of adhering to a Negative Interest Rate Policy aimed at spurring growth and staving off deflation, a shift might be on the horizon. The central bank is hinting at moving away from this policy, stirring up waves in the financial markets. This decision is not just a policy change: it's a beacon of hope, signaling a potential return to normalcy.

The prospect of positive interest rates is more than a financial adjustment. It symbolizes a strengthening economy, a nation ready to reclaim its place on the global economic stage, and it’s happening just as other economies are tightening their belts for an austere 2024.

The Japanese yen could become attractive to foreign fund managers once again, and since big investors may well be looking for a place to park their wealth as global recession fears loom, their reaction could be equally big.

That’s the narrative being whispered in the trading forums, but before hitting the Sell button, read what the Wall Street Journal recently reported.


Bank of Japan Chief, Bucking Expectations, Avoids Talk of Rate Increase

BY MEGUMI FUJIKAWA | UPDATED DEC 19, 2023 05:13 AM EST

Yen falls after Ueda says he still isn’t sure prices are on steady upward trend

TOKYO—Bank of Japan Gov. Kazuo Ueda refrained from giving any hint of an imminent interest-rate increase, saying that he wants to see more evidence showing the strength of wages and prices.

“When it comes to whether we will take a step toward normalizing policy, it is an opinion shared by many members of the policy board that we want to see more information on whether a virtuous cycle of wages and prices is coming into reality,” Ueda said at a news conference on Tuesday.

Earlier in the day, the central bank maintained its key short-term interest-rate target at minus 0.1%.

The announcement and Ueda’s dovish comments disappointed some traders who had expected the bank to at least give clues on when it intended to scrap the negative rate. That led to a sharp fall in the yen.

The yen weakened to 144.68 against the dollar Tuesday evening in Tokyo, compared with around 142.60 before the BOJ’s policy decision.

In recent weeks, the yen regained some ground against the greenback on expectations that the interest-rate gap between the U.S. and Japan would become narrower soon. The Federal Reserve is expected to start cutting rates next year.

Japan has long struggled with flat or falling prices, which policy makers view as a factor keeping the economy generally sluggish. Although inflation has remained above the bank’s 2% target for more than a year, Ueda has repeatedly cautioned that it is too soon to declare victory.

Analysts and traders still say the Bank of Japan is likely to scrap negative interest rates in the first part of next year, perhaps at policy meetings in January or April when the bank makes quarterly updates to its inflation forecast.

Ueda said he saw a higher probability that Japan’s underlying inflation would reach the 2% target. Among positive developments, he cited a request by Japan’s largest labor federation for a bigger pay increase next year and higher service prices, which reflect increasing labor costs.

“The BOJ shouldn’t miss a once-in-a-lifetime opportunity,” said Daiwa Securities economist Mari Iwashita. If the BOJ doesn’t raise short-term rates in January, it may lose the chance to do so until the Federal Reserve is done cutting interest rates, she said.

Iwashita said an end to negative rates probably wouldn’t be followed by a series of rate increases, in part because the government is seen as cautious about tightening too much. “It seems that there is a very high hurdle in raising rates after the bank ends negative rates,” she said.

Ueda said possible Fed rate cuts, including the reasons behind such a decision, would affect the Japanese economy and currency rates. But he said it would be inappropriate for the BOJ to rush into a policy shift just so it could get ahead of a possible Fed move.

The governor also suggested that the bank wasn’t likely to send clear hints on coming policy changes, saying board members at each policy meeting needed to review the latest data.


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Author:

Paul Reid
Paul Reid

Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.