Top 3 reasons why the Bank of Japan will let the yen depreciate further

on Jul 7, 2022
  • JPY pairs stick close to their highs
  • Inflation is barely at the BOJ's target
  • Households will get used to price increases

To many traders, the breakout higher of the Japanese yen pairs in 2022 is the story of the first half of the trading year. Indeed, the dynamic of the moves has been nothing short of spectacular.

However, fighting such a trend, or buying the Japanese yen on the grounds that it depreciated too much in a short time, is a risky strategy. That is particularly true because the Bank of Japan is unlikely to be disturbed by such movements.

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As such, instead of looking for ways to short the Japanese yen pairs, investors should rather question why the Japanese yen pairs still trade close to their highs? In other words, every dip is being bought.

Here are three reasons why the Bank of Japan is not bothered by the yen’s depreciation:

  • Inflation is still very low
  • BOJ believes that households are getting used to the price increases
  • JPY traders are used to the BOJ pushing monetary policy to extremes

Inflation barely moved above the BOJ target

For decades, the Bank of Japan had struggled to bring the inflation rate to its 2% target. It took extreme measures to reach an inflation rate in line with sustainable economic growth – and it only recently reached the target.

While the West faces much higher inflation (e.g., 8.6% in the United States), Japan only sees modest price increases in line with the Bank of Japan’s inflation target. Moreover, the recent success in bringing inflation to target comes at the end of extreme monetary policy easing. So why change things now and risk a return to a deflationary area just when economists fear a recession in the Western countries?

BOJ believes households are becoming more tolerant of price increases

The Bank of Japan’s Governor, Kuroda Haruhiko, was in the news recently. He said that the central bank believes that households are becoming more tolerant about price increases – hinting that households will get used to a bit higher inflation just like they got used to negative inflation for so many years.

It is not the first time when the BOJ has pushed monetary policy to extremes

Many critics say that the pace of monetary easing in Japan is unsustainable. It may very well be true, but you don’t want to fight a central bank as a trader.

And you certainly don’t want to fight a central bank with a history of extreme monetary policy decisions. Just now, when other central banks race to tighten the interest rate, the Bank of Japan is doing the opposite and is easing the monetary policy.

It tells us it is not bothered by the Japanese yen’s weakness, so we should expect the move that started in March this year to continue.

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