BOJ decision triggered Yen rally
JPY/USD delivered an outstanding rally last week and generated over 5.1% returns in the week of April 24, 2016. Market experts estimated that Bank of Japan would grant more economic aid and ease monetary policy via a hike in the monthly purchases of government bonds and exchange traded funds during their meeting on April 28, 2016. On the other hand, the Bank of Japan held off from expanding monetary stimulus. Moreover, the central bank has maintained its negative 0.1 percent deposit rate and its 80 trillion yen base money target. During the meeting, Bank of Japan also cut its gross domestic product growth (GDP) forecast to 1.2 percent growth for the 2016-2017 fiscal year, as compared to its earlier estimate in January of a 1.5 percent expansion. As a result, the US Dollar index lost over 2.1% in the April 24, 2016 week due to solid yen rally. Moreover, the Nikkei 225 (INDEXNIKKEI: NI225) plunged over 7.4% in a span of two days (from April 28 to May 2, 2016). Even the US markets faced the brunt of BOJ’s decision and accordingly the Dow Jones Industrial Average (INDEXDJX: .DJI) also lost over 1.5% in just two days (on April 28 to April 29, 2016). BOJ’s decision coupled with ongoing concerns of weak inflation, household spending and GDP cut led to the above decline.
Major Equity Indices (Source: Thomson Reuters)
Moreover, the data in March 2016 had indicated that the consumer prices are slipping at the fastest pace in three years while even household spending fell at a rapid pace in a year. In addition, major banks like Goldman Sachs and Bank of America Merrill Lynch, were expecting for more purchases of exchange-traded stock funds (ETFs) alongside interest rate cuts and were worried about the gloomy outlook of the economy. Moreover, Bank of Japan even cut the inflation (CPI) forecast for 2017 in its quarterly review when compared to 2016. Therefore, the CPI is also expected to reach 2% during 2017.
During 2015, the short term interest rates of two currencies (Danish Krone, Swiss Franc) became negative while Japanese Yen became negative in 2016 on the back of BOJ decisions. For both Japanese Yen and Euro, short term market interest rates have in fact turned negative but only the Yen has negative long term interest rates. On the other side, the recent yen rally was driven by the negative inflation estimates which would impact the import prices and the domestic prices. The low interest rate might also affect the banks and the financial institutions’ profits as there would be an effect on the cost of borrowings even though the financial institutions have enough capital bases to do their business of borrowing. Moreover, the yen rally was also supported on expectations of a possible deeper negative rates and rise in Exchange Traded Fund buying. BOJ is also shifting away from quantitative to qualitative easing as well as buying more JGBs (Japanese government bonds) which could lead to more appreciation of Yen against the US dollar.
US Dollar/Japanese Yen Fx Spot Rate (Source: Thomson Reuters)
The markets would be tracking the Fed decision in the coming FOMC meeting of whether they would go for a further rate hike despite the ongoing volatile conditions in the economy. Even the Bank of Japan’s Monetary Policy Meeting on June 15 would decide the Yen’s fate against dollar in the coming months. On the other hand, latest open poll by Reuters indicate that the Japanese yen may fall about 8% against the U.S. dollar during the coming year. Despite the recent rally (jump to an 18-month high against the dollar), few experts are weighing on the side of weaker yen outlook. Nonetheless, softness in consumption and weak inflation data coupled with BOJ’s decision to avoid aggressive stimulus resulted into stronger yen with softness in equity markets.
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