The Japanese Yen traded with little volatility during the most recent trading days. Futures traders are looking ahead to the next Bank of Japan (BoJ) policy meeting for clues on monetary policy direction, keeping the Yen rangebound against the US Dollar. Additionally, the currency’s value is largely determined by how well the Japanese economy performs and the BoJ’s monetary policy choices. With mixed economic signals still presenting themselves, market players stay wary with a risk-on/risk-off mood that will continue to impact the Yen’s path.
On Wednesday, the Yen found it difficult to take much impetus. Weak macroeconomic data and a generally positive risk complexion among investors suppression it. The BoJ’s monetary policies have been extreme in comparison to other central banks, most notably the U.S. Fed. This difference introduces a further complication to the future outlook for the Yen. Traders across the market are actively watching these movements, as they have considerable implications for the currency’s future trajectory.
Economic Performance and Currency Value
The value of the Japanese Yen is highly influenced by the performance of the Japanese economy. Traders were certainly affected by the recent economic indicators, which have painted a conflicting picture. Despite the poor March results, Japan’s Retail Sales have increased by 3.1% y/y in March, but this was well below market estimates. Underwhelming major growth figures like these can sap investor confidence and weigh on the Yen’s performance.
Japan’s Industrial Production saw a surprise contraction of 1.1% in March. This drop was much deeper than expected by analysts. This slowing down casts a troubling shadow on the current status of Japan’s manufacturing industry. It would do great damage to our long-term economic prosperity. Weak economic data tends to decrease demand for the Yen as a safe haven currency. This trend becomes more evident when bullish market sentiment persists.
These contradictory economic currents in Japan create broad uncertainty about forthcoming Bank of Japan policy decisions. The central bank remains committed to an ultra-loose monetary policy. Consequently, the gap between Japanese and US bond yields has increased. This divergence makes the Yen’s value proposition in global currency markets a tough sell.
Influence of Bank of Japan Policy
The Bank of Japan plays a direct role in determining the value of the Yen. It achieves this by implementing an expansionary monetary policy through several initiatives. Under its currency control mandate, the BoJ’s decisions tend to set the market tone and direction as they shape the expectations and thus trading strategies of investors. After its next policy meeting, traders will be closely gauging for clues about possible shifts in its hawkish monetary posture.
Until recently, the BoJ’s policies were not so different from other major central banks. This is particularly the case for the US Federal Reserve. Indeed, with inflation all the rage globally, other central banks are raising interest rates. At the same time, the Bank of Japan (BoJ) is equally committed to negative rates. This divergence risks accelerating volatility and further Yen depreciation if not proactively addressed.
Yet, despite all these obstacles, indications are that inflation in Japan is beginning to spread out. This change is a step toward more normalization of Bank of Japan policies going forward. If inflationary trends persist, the Yen may start to build some positive momentum. Markets may begin to price in a move from the current ultra-loose monetary policy.
Market Sentiment and Safe-Haven Status
The Japanese Yen is perhaps the most celebrated safe-haven investment during periods of stress or uncertainty in the capital markets. The Yen is so appealing to investors because of its historical dependability and stability when compared to other currencies. During periods of heightened geopolitical risk or economic uncertainty, the attractiveness of any safe-haven asset—including the dollar—increases with demand.
That said, prevailing risk sentiment seems to be optimistic, capping the demand for counter-cyclical or safe-haven assets such as the Yen. Underlying global markets have been rather resilient, with strong equity performance and reduced likelihood of recession boosting sentiment. As a result, investors are reluctant to invest money through traditional outlets safe havens.
So on Wednesday, upbeat market mood suppressed any upside for the Japanese Yen. Yet with all of the currency’s safe-haven status, the currency could not find a bid. Traders need to ride this tricky seesaw of risk appetite and economic fundamentals when trying to predict future moves in the currency.