In October, the Governor of the Bank of Japan (BOJ), Haruhiko Kuroda, announced there would be no early exit from a loose monetary policy. This meant the interest rate of -0.1% would stay the same and Japan government bonds would continue to yield 0%.
By early December, analysts were expecting a shift in policy allowing for a rise in interest rates, as the Japanese economy struggled with soaring import rates and a struggling yen. Many believed the government would have no choice but to unwind the ultra-loose monetary policy in 2023, as the current policy to beat deflation is out of line with current rate of inflation. This was hinted at in late December, by a statement from BOJ Governor Haruhiko Kuroda.
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No Change in Policy
With the outlook for the Japanese economy looking less optimistic, Kuroda announced there would be no change in policy, but investors are looking ahead to when Kuroda’s tenure ends in April. Many believe the existing policy will be revised when Kuroda’s replacement is appointed. This was confirmed when Prime Minister Fumio Kishida said a decision on whether the current monetary policy for tackling inflation is working would be made in April. As a result of the statement, the JGB yield rose to 0.225% for a brief time and the 10 year bond yield also increased slightly, to 0.445%.
Analysts are divided as to whether existing policy will change once Kuroda exists, putting the likelihood somewhere between 25% and 75%.
Kishida said in a statement that the BOJ is committed to achieving 2% inflation as soon as possible. He’s said previously that the only way to achieve this is by substantially increasing pay. However, this must be done in a controlled manner, and is likely to happen naturally anyway as labour shortages and other changes impact the Japanese job market. As Japan’s labour market changes, firms will have to adapt.
How fast wages rise is a critical factor in how quickly the BOJ raises yield curve control targets. These are currently at 0% for the 10-year bond and -0.1% for short-term interest. Experts say the BOJ will not announce any policy changes before time, to avoid causing any liquidity problems in the bond market. There has been much criticism of the BOJ for its decision to buy bonds to defend the cap on yields. Many believe it has caused the yen to fall and pushed up the cost of importing raw materials.
Forex traders will be watching what happens very closely.
A Safe Haven Currency
Many Forex traders see the Japanese yen as a ‘safe haven’ currency, which is one of the biggest reasons for the strength dynamics behind it. When Forex investors and traders are concerned about the economic conditions around the world, the Japanese yen is often worth buying, as it’s safer to invest in and allows them more protection for their assets. Due to the strong demand for the currency, the value is driven up. You can find out more on what is Forex trading here.
Safe Investment
Along with being considered a ‘safe haven’ investment, the Japanese yen is a fairly safe and low-risk currency investment overall. This makes it an ideal choice among newer Forex investors or investors who are more risk-averse. The safety and stability of the Japanese yen come from the stability of the Japanese economy, which means that it’s less likely to experience large fluctuations.
Buying Japanese Yen on the Forex Market
There are various ways that you can invest in the Japanese yen, but the Forex or foreign exchange market is one of the most popular. The Forex market allows you to use one currency to buy another in a highly leveraged situation. When the currency that you have purchased appreciates in value to make it worth more than the currency you used to make the purchase, you can make a profit. On the Forex market, the Japanese yen is one of the most commonly traded currencies against the US Dollar, with the currency pair on the market known as USD/JPY. Before using the Forex market to invest in the Japanese yen, it’s important to understand the greater leverage, and therefore the greater risk that is often involved.
ETFs
One of the easiest ways to gain exposure to the yen in forex trading is by using exchange-traded funds, also known as ETFs. Another popular strategy is by investing in the futures market, buying stocks in Japanese companies, or buying government bonds.
Popular With Carry Trades
The Japanese yen is one of the most popular currency options for carry trades. Carry trades involve investors borrowing Japanese yen at a low interest rate, before using the funding to purchase currencies with higher yields. If the Japanese yen appreciates in value in the future, this can be a very profitable strategy.
Whether you want to invest in currencies using the Forex market, or other options such as Futures, EFTs, and more, the Japanese yen has a strong, stable dynamic in the market for various reasons.
