USD/JPY Outlook: Is a Reversal on the Cards for the Yen?
The Japanese Yen has fallen dramatically in 2022. So much so, the USD/JPY rate is close to its highest level in over 20 years. But signs are emerging that the Yen may be about to bounce back.
The Japanese Yen is the worst-performing G10 currency this year. So far, the Yen has lost almost 20% of its US Dollar purchasing power. Why? — well it comes down to the differing approaches from the countries’ central banks. Whilst the Federal Reserve is raising interest rates to fight inflation, the Bank of Japan (BoJ) has kept interesting rates at -0.10%.
Even in the face of rising prices, the BoJ remains resolute in its ultra-dovish path. Instead of raising rates to battle inflation like many of its peers, the central bank has just one aim — stimulating economic growth. As such, capital has deserted the Yen, in favor of currencies yielding a higher rate of interest.
So without the backing of the BoJ, what could trigger a reversal in the USD/JPY rate?
Is the US Dollar too Strong?
Although the Yen’s weakness has played a party in its demise, it’s only half of the equation. The US Dollar has been blisteringly strong throughout 2022, reflecting the Fed’s willingness to tighten monetary policy to contain decades-high inflation.
The greenback has not only benefitted from a proactive Fed, but also from strong demand from emerging markets. The flight-to-quality follows a stampede to buy US Dollars as a means to protect against local currency losses. However, recent economic data indicates the US economy is slowing down.
The market expects the FOMC to hike interest rates by 75 basis points, from 1.75% to 2.50% on Wednesday. Whilst a 75bp hike will not come as a surprise, the press conference after the announcement may give clues on future policy adjustments. Any mention of “recession” or “economic slowdown” may dishearten the die-hard US Dollar bulls.
Another factor to consider, is the drop in commodity prices. Critical inflation inputs like oil and industrial metals have fallen precipitously in recent weeks. And though the backward-looking inflation data won’t reflect this yet, you can bet it will going forward. Subsequently, an economic slowdown, twinned with low commodity prices could force the Fed to abandon its under-loose policy, sending the Dollar lower and the Yen higher.
USD/JPY Exchange Rate Chart
