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Japanese Yen Weakens on BOJ Uncertainty Over Monetary Easing

July 22, 2019 at 17:16 by Andrew Moran

Japanese currency and coinsThe Japanese yen is softening to kick off the trading week after investors learned very little from a much-anticipated speech by the head of the Bank of Japan (BOJ). On Monday, central bank governor Haruhiko Kuroda disappointed investors when he said any monetary policy moves will depend on the performance of the national economy and global markets. Still, most economists believe the next move for the BOJ will be additional easing.

Speaking at a Michel Camdessus Central Banking Lecture seminar hosted by the International Monetary Fund (IMF), Kuroda said that the central bank will monitor developments in the global economy and volatile market developments that could impact the Japanese economy, which has been treading on thin ice in recent months.

We will carefully examine various risk factors, in addition to developments in economic activity and prices as well as financial conditions, and weigh the benefits and costs of the policy effects.

In this way, the Bank will continue to conduct its policy in an appropriate manner.

This comes days after Kuroda stressed BOJ independence, despite the central bank working closely with Prime Minister Shinzo Abe, who just declared victory in national elections.

Kuroda, meanwhile, encouraged other central banks to not be too negative when it comes to how they stimulate the economy with more monetary easing, even if it means cutting interest rates.

He did turn heads when he noted that the world’s third-largest economy is no longer fighting deflation, something Japan has grappled with since the 1990s, which is better known as the Lost Decade. How did the BOJ defeat this persistent trend? Through monetary easing. But, according to Kuroda, Japan is still short of its 2% inflation target – inflation was 0.7% in June.

But, in the process, the BOJ has shaped financial markets through its astronomical acquisitions of Japanese government bonds (JGBs) and exchange-traded funds (ETFs). Today, the central bank holds nearly half of the outstanding stock of JGBs. While an unprecedented maneuver, Kuroda acknowledged that this measure might have consequences to financial markets in the future, particularly banks’ profit levels.

Moreover, in the last several months, many BOJ executives have gone on record confirming that they are prepared to increase stimulus if the economy loses momentum. A plethora of recent data do show weakening is happening: machine orders plummeted in June, foreign bond investment plunged, the Tertiary Industry Index contracted, and retail sales have barely budged above 1%.

Reuters poll of economists found that most of the respondents anticipate expanded stimulus.

The USD/JPY rose 0.14% to 107.88, from an opening of 107.72, at 17:02 GMT on Monday. The EUR/JPY jumped 0.13% to 121.04, from an opening of 121.01.

If you have any questions, comments, or opinions regarding the Japanese Yen, feel free to post them using the commentary form below.

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