Safe Haven Appeal to Keep Yen Supported

Key points in the Japanese yen:

Summary of the Japanese Yen Q1

The Japanese Yen had an interesting first quarter to say the least, as the Japanese yen started the quarter looking vulnerable against the greenback. The US Federal Reserve appeared poised to continue its aggressive bullish cycle while the BoJ seemed poised to continue its easy monetary policy path.

February turned out to be a tough month for the Japanese yen as it took heavy losses against the US dollar. The losses were compounded by the growing prospects of a higher peak rate from the US Federal Reserve as US data came in better than expected for the majority of February. Late February was the beginning of the yen’s recovery as March saw banking sector woes accelerate the decline of the US dollar against the Japanese yen as the pair fell about 700 odd pips since February 28th.

As we head into the second quarter, the yen has been basically flat against the dollar with early gains made in the first quarter effectively fading away. The question we have to ask is will we see a continuation of the recent return of the Japanese yen over the coming months? While this article focuses on the fundamental outlook for the Japanese yen, the technical outlook for the second quarter paints an interesting picture – download the full second quarter forecast below:

The Bank of Japan (BoJ) welcomes a new governor and the bank’s policy

The second quarter begins with the Bank of Japan welcoming a new governor in Kazuo Ueda, who will take over on April 9th. The next ruler faces the difficult task of untangling the complex monetary policy of the past decade. Any optimism about Ueda’s appointment has largely faded in light of his statements during his nomination process to parliament.

Ueda has stated that for the time being he would like to continue “Abenomics” as the Japanese economy is facing high inflation and slow wage growth. Inflation remained steadily rising throughout 2022 and continued into early 2023 before finally easing in February from four-decade highs. February print came in at 3.3% y/y while core consumer prices came in It rose 3.1% year-on-year, the lowest in 5 months, matching expectations but above the Bank of Japan’s 2% target for the 11th consecutive month. On a monthly basis, consumer prices fell 0.6% in February, the first decline since October 2021. Despite this, prices for services rose as the so-called core core index (excluding fresh food and energy) accelerated to 3.5% in February (versus 3.2 % in January). This is a sign of continued underlying pressures while the Bank of Japan may breathe a sigh of relief that this is demand driven inflation they were hoping for if wage growth can keep up.

Japan’s inflation rate on an annual basis

Source: Economics of Trade, Ministry of Interior and Communications

Another sign of the challenges evident in the Japanese economy came in the form of the Reuters Tankan survey, which found that moods in major industrialized countries remained dismal for the third month in a row. It is clear that the recent concern about global demand is weighing on the sentiment and weighing on Japan’s usually massive export sector.

JPY Q2 Outlook – More Gains in Store for the Yen?

The Yen has benefited from its safe-haven appeal recently as fears of contagion from US bank failures and Credit Suisse struggles weighed on sentiment. We have seen calmer markets lately, but the return of fear and uncertainty may work in favor of the yen in the second quarter.

The Bank of Japan is expected to allocate $15 billion to help inflation ahead of local elections in April. The measures are likely to include aid for low-income families and support for families who use LPG, according to documents from the Cabinet Office. Opening up the Chinese economy along with easing Covid entry requirements for Japan could lead to an influx of Chinese visitors and give the economy a much needed boost.

The New Bank of Japan governor may have reiterated his support for an easy monetary policy path, however, given the rising inflation picture, aid package and potential influx of Chinese visitors, the possibility of more yield curve control cannot be ruled out. According to reports, Prime Minister Kishida’s administration sees aggressive monetary easing as an issue with the Bank of Japan apparently monitoring the impact of extending control in December until the term of incumbent Governor Kuroda expires. The rise in core CPI (excluding fresh food and energy) in February hinted at underlying price pressures and could reignite speculation that the Bank of Japan may implement policy normalization sooner than expected. However, at this point, given the recent market turmoil surrounding the banking sector, further expansion of the sphere of control remains the most likely option. This would provide further support for the yen and lead to an appreciation of the Japanese currency.

Written by: Zain Fouda, market writer for DailyFX.com

Connect with Zain and follow her on Twitter: @employee