The Japanese yen has continued to weaken on Wednesday for the second day in a row after dovish comments from Bank of Japan (BoJ) Deputy Governor Shinichi Uchida.
Market volatility concerns
BoJ’s Uchida explained on Wednesday that the central bank should continue with its current level of monetary easing and clarified that, “We won’t raise rates when markets are unstable.”
The Deputy Governor also noted that the BoJ’s interest rate strategy will be adjusted if market volatility changes their economic forecasts and risk assessments. Due to the recent market volatility, he said that the central bank will closely monitor the economic and price impact of their policies.
Japan’s data reinforce a transition to a rising interest rate environment
Japan’s Chief Cabinet Secretary Yoshimasa Hayashi stated on Tuesday that “wage increases are expected to extend to part-timers and small businesses by autumn, supported by strong Shunto results and minimum wage hikes.”
Average income in June increased according to Japan’s Labour Cash Earnings data which showed a 4.5% year-on-year increase, up from the previous 2.0% and the forecast of 2.3%. This is the biggest increase since January 1997, which has reinforced Japan’s transition toward a rising interest rate environment.
Upside risk to Japan’s inflation
The Bank of Japan’s June meeting minutes revealed concerns about rising import prices due to the yen’s recent decline, potentially driving inflation higher. One member highlighted that cost-push inflation could elevate underlying inflation if it leads to higher inflation expectations and wage increases. Additionally, the BoJ’s Quarterly Outlook Report released on Thursday suggested that wages and inflation might surpass expectations, with rising inflation expectations and a tight labour market.
USD faces challenges as rate cut expectations increase
The USD may face challenges as the markets anticipate a bigger rate cut beginning in September. CME FedWatch tool indicates a 67.5% chance of a 50-basis point Fed rate cut in September, which has increased from last week’s 13.2%.
Federal Reserve Bank of San Francisco President Mary Daly said that US inflation was moving towards the Fed’s 2% target and that it was possible to start cutting rates in upcoming meetings.
If economic conditions deteriorate, Chicago Fed President Austan Goolsbee stated on Monday that the US central bank is prepared to act. He noted, “We’re forward-looking about it, and so if the conditions collectively start coming in like that on the through line, there’s deterioration on any of those parts, we’re going to fix it.”
What determines the value of the Japanese yen?
There is a variety of factors that could influence the JPY exchange rate. Some of the factors that you should watch are Japan’s economic performance, the Bank of Japan’s policies, the yield differential between Japanese and US bonds, and trader risk sentiment.
How does the Bank of Japan influence the Japanese yen?
The BoJ occasionally intervenes in currency markets, usually to devalue the yen, but does so cautiously due to political concerns from key trading partners. Its current ultra-loose monetary policy, characterised by significant economic stimulus, has led to the depreciation of the yen against major currencies. This trend has intensified recently due to a growing policy divergence between the BoJ, which maintains low interest rates, and other major central banks that have sharply increased rates to combat high inflation.