- The fourth quarter’s start finds USD/JPY not far from where it began
- However, this time the “USD” side is in the ascendant
- For as long as monetary differentials drive, it is likely to stay there
The Japanese Yen has bossed the greenback for much of 2017 but looks set to struggle as 2017 fades to black.
The fourth quarter’s start line finds the US Federal Reserve firmly inclined raise interest rates further, assuming the economic data let it, and to start winding down its crisis-bloated, $4.5 trillion balance sheet. Meanwhile the Bank of Japan remains tightly-wedded negative base interest rates, control of the Japanese yield curve to keep ten-year yields near zero and a massive bond-buying program. In other words, the monetary taps are wide open in Tokyo and likely to remain so, possibly for years.
Indeed, there is one member of the BoJ’s policy board who last month said that even more stimulus would probably be needed to hit the central bank’s target – consumer price inflation sustainably around 2% (a very long way off from the current 0.7% rate). Former Mitsubishi UFD economist Goushi Kataoka appears to favour even looser settings. He stands alone on that, but the BoJ’s committee remains an extremely dovish group.
Against this backdrop USD/JPY looks set to rise, assuming risk appetite holds up and conflict between Pyongyang and Washington DC remains confined to the verbal and diplomatic. The procession of US tax-reduction proposals through Congress will also be closely watched. Logjam there could set the US Dollar back, but a relatively smooth passage would be sure to lend support.
In short however, interest rate differentials are back in charge and, for as long as they are, the Yen is going to have a tough time. And not just against the US Dollar. After all, some degree of policy tightening is now in the mix for the European Central Bank, the Bank of England and the Reserve Bank of Australia as well as the Fed.
— Written by David Cottle, DailyFX Research
Contact and follow David on Twitter:@DavidCottleFX
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