- BoJ Remains Unanimous on Easing Cycle
- Japan Government Responds with FX Intervention
- USD/JPY Volatility to Persist as Fed Pursues Restrictive Policy
BoJ Remains Unanimous on Easing Cycle
USD/JPY is on track to test the August 1998 high (147.67) as the Federal Reserve pursues a restrictive policy. The Yen may continue to underperform its US counterpart as the Bank of Japan (BoJ) votes unanimously to maintain the Quantitative and Qualitative Easing program with Yield-Curve Control.
The BoJ appears in no rush to switch gears as Japan’s economy is “expected to be under downward pressure stemming from a rise in commodity prices.” Governor Haruhiko Kuroda and Co. appear ready to stick to their easing cycle over the coming months. The central bank pledges to increase the monetary base until the year-on-year rate of increase in the observed CPI exceeds 2 percent and stays above the target in a stable manner.
Japan Government Responds with FX Intervention
Following the September BoJ meeting, USD/JPY marked the largest single-day range since June 2016 as Vice Finance Minister for International Affairs Masato Kanda revealed that the government has “taken decisive action” in response to “speculative activities.”
Over the coming months, the Yen may face increased volatility as Japan intervenes in foreign exchange markets for the first time since 1998. Its efforts may fail to have a lasting impact on major exchange rates amid the rising interest rates in other advanced economies.
USD/JPY Volatility Persists with Fed’s Restrictive Policy
Fed forecasts suggest the US central bank will retain its current approach in combating inflation. Speculation on FOMC policy may largely influence USD/JPY over the coming months as the committee pursues a restrictive policy.
Fed Interest Rate Dot-Plot
Source: FOMC
The upward revision in the interest-rate dot plot raises the scope for another 75bp rate hike as the Fed Funds rate is now projected to exceed 4.00% by the end of 2022. The bank may implement further policy outlook adjustments as officials look for “compelling evidence” that inflation is falling. The FOMC appears to be on track to carry its hiking-cycle into 2023.
It remains to be seen if the BoJ will come under pressure to wind down its easing cycle as the FOMC plans to carry on its hiking cycle. Deviating paths for monetary policy may continue to sway FX markets. And the Yen may face headwinds through year’s end.
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