The Japanese Yen is the third most traded currency, behind only the U.S. Right now, it is unstable due to poor internal economic policy and voracious external market forces. Japanese Prime Minister Sanae Takaichi last month unveiled a multi-trillion yen new package of economic stimulus. These initiatives focus on reducing the long-term inflation effects on families and businesses. This announcement comes as the US – Japanese bond yield gap has been widening, raising concerns. This trend has historically put upward pressure on the US Dollar and downward pressure on the Yen.
It’s no surprise that the Yen has always been considered a safe-haven investment. During periods of significant market volatility, investors flock to the Yen as a safe haven currency due to its reliability and stability in uncertain economic conditions. Yet global economic conditions continue to change at a breakneck pace. As they sharpen their pencils, traders’ risk sentiment will continue to be central in dictating currencies’ value. The Bank of Japan’s unconventional policies, especially its ultra-loose monetary stance, play a crucial role in these dynamics.
Influence of the Bank of Japan
In this regard the value of the Japanese Yen is directly related to the performance of the Japanese economy. It is a reaction to the active policies pursued by the Bank of Japan (BoJ). One of the BoJ’s mandates is currency control, making its decisions crucial for the Yen’s strength. This current ultra-loose monetary policy is exacerbating this divide and accelerating a divergence in policy direction. This divergence is most acute between Japan and the other central banks, particularly the US Federal Reserve.
As markets have speculated over the past few months on a gradual unwinding of this policy, the Yen has enjoyed a boost. As market participants have begun to price in possible shifts in BoJ strategies, they respond to the changing global economic environment. Takaichi’s new economic measures will most directly form the future decisions of the Bank of Japan. This will be crucial on both inflation fighting and currency appreciation efforts.
Economic Stimulus and Inflation Concerns
The economic stimulus package ordered by Takaichi is estimated to exceed last year’s ¥13.9 trillion and is structured around three primary pillars: counter-inflation, investment in growth industries, and national security. These new measures are intended to relieve the financial stress on families and enterprises in light of the exacerbated Argentine inflation —currently over 100%—.
Inflation is creating existential crises for the Japanese government. Yet they are committed to long-term price stabilization and under pressure to implement strategies that spur broad economic development. The proposed stimulus may affect perceptions of risk among traders, further influencing the Yen’s value against other currencies viewed as riskier investments.
Market Dynamics and Future Outlook
In the short-term, the growing spread between 10-year US and Japanese yields is helping to push the US Dollar higher. This adds to the complexity surrounding the Japanese Yen outlook. A further short term bearish pressure on the Yen will stem from heightened interest from investors in higher yielding assets. Even so, turbulent market conditions would normally increase the Yen’s value as investors flock to the safety of more secure currencies.