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The Bank of Japan (BoJ) is a major central bank, setting the monetary policies that aim to maintain price stability and a strong Japanese financial system. As a central bank, the BoJ directly impacts the forex market, so policy meetings and the decisions they bring about are important for FX traders to follow.

Learn about the Bank of Japan and forex, the bank’s mandates, how monetary policy affects fx trading, and the implications when trading JPY.

What is the Bank of Japan?

The Bank of Japan, or Nichigin, is the Japanese central bank. It implements monetary policy and issues currency to maintain stability of the financial system. The bank’s Policy Board holds regular monetary policy meetings, deciding on their approach to interest rates, and how they intend to influence inflation.

Who Owns the Bank of Japan?

The government of Japan has a 55% ownership of the bank, and 100% voting interest. The remaining 45% is a public float, traded as JASDAQ. As of August 2019, the BoJ governor is Haruhiko Kuroda, who has held the position since March 2013 and is currently serving his second five-year term, which is due to run until April 2023.

Key Economic Mandates of Japan’s Central Bank

The BoJ considers its core mandates to be:

  1. Maintaining stability of the financial system
  2. Maintaining price stability

Maintaining stability of the financial system

The BoJ implements its monetary policy with the aim of maintaining financial system stability, which involves currency control, monetary control and the issuing of banknotes. This also feeds into the BoJ’s other core aim, as currency and monetary control is part of the plan to achieve price stability and develop the economy.

Maintaining price stability

Maintaining price stability is the other central aim of the BoJ. Exports are essential to Japan, so the BoJ tries to keep prices as stable as possible and will manipulate interest rates with the intention of developing the national economy. The bank defines ‘price stability’ as a 2% increase year on year in the Consumer Price Index (CPI).

How does the BoJ carry out its mandates?

The BoJ holds regular monetary policy meetings (MPMs), where it sets the official interest rate and other monetary policies in the hope that they will achieve price stability and financial system stability. MPMs are held eight times a year and last for two days, during which time the Policy Board (the Governor, two Deputy Governors and six other members) will discuss and implement monetary policy. As of July 2018, the base rate remains set at -0.1% in the hope of growing the economy.

How Bank of Japan Monetary Policies Affect the Yen

Japan has suffered from an ailing economy with very low inflation over the course of the last few decades, consistently failing to achieve 2% inflation. The BoJ has adopted what is known as a loose monetary policy, maintaining a low interest rate in the hope of boosting the economy.

When there is little incentive to save due to a low interest rate, the idea is that people will spend more, put money into the economy and encourage inflation. This has seen the yen becoming increasingly weak against major currencies, including the US Dollar and the Euro, ever since Kuroda took office.

USD/JPY went from 94.00 in March 2013 to over 125.00 in June 2015, after Kuroda announced his first raft of policy measures. And while it has fluctuated since then, the yen’s value has remained well below its level when he became governor, with USD/JPY sitting around 108.00 in July 2019.

USD/JPY chart showing the fluctuations in value around major BoJ announcements

Chart showing USD/JPY fluctuations around major BoJ announcements

Following a period from 2012 to 2013 when the yen was relatively strong against the US Dollar, it fell to USD/JPY 125.00 in June 2015 after the announcement of Kuroda’s initial policy measures. The value fell once again in January 2016, when Kuroda made the shock announcement that the bank would implement a negative interest rate for the first time ever, charging -0.1% on deposits held with the bank. This policy aims to get financial institutions to withdraw their cash to invest elsewhere, rather than making a loss by hoarding cash.

This announcement caught the markets by surprise as Kuroda had only recently told the parliamentary budget committee that he was not looking to introduce any policy changes for the time being. The yen fell against currencies including the dollar and pound, while the Japan 225 went up in the hours following his announcement.

How to trade BOJ interest rate decisions

BoJ interest rate decisions are made with the aim of increasing spending and investment, influencing inflation. Changes in demand for stocks and currency as interest rates change can create forex trading opportunities. Even when interest rates remain the same, the anticipation surrounding important events like monetary policy meetings can affect the forex market.

Short-term interest rates are fundamental in determining currency valuation, so traders will watch them closely. Here’s the general pattern:

Market expectations

Actual Results

Resulting FX Impact

Rate Hike

Rate Hold

Depreciation of currency

Rate Cut

Rate Hold

Appreciation of currency

Rate Hold

Rate Hike

Appreciation of currency

Rate Hold

Rate Cut

Depreciation of currency

Trading interest rate decisions can be enhanced by:

Top takeaways of the BOJ and Forex Trading

  • The Bank of Japan has a fundamental role in determining the value of the yen
  • Short-term changes to interest rates are a key factor in currency valuation
  • Bank of Japan monetary policy meetings can influence the value of the yen, as this is when key decisions are made.