The dollar continues to grow on expectations of a more aggressive Federal Reserve rate. Hawkish rhetoric strengthens its position in relation to the yen, which is suffering from the soft policy of the Japanese central bank.
This morning, the US currency is on track for the seventh consecutive weekly rise against the yen.
Since Monday, the Japanese currency has fallen by 1.6%. At the beginning of the day, it was trading at 128.44 per dollar, which is slightly above Wednesday's 20-year low of 129.43.
The pressure on the yen is exerted by the dovish policy of the Bank of Japan. It continues to defend its policy of ultra-low interest rates.
In accordance with this rate, the central bank undertakes to maintain the yield of 10-year bonds at 0%. The indicator is at the level of 0.245% on Friday.
Recall that the "ceiling" for 10-year JGB bonds is 0.25%. According to most Japanese economists, the central bank should now allow long-term rates to deviate even further from the 0% target.
Experts believe that in the current conditions it would be reasonable to expand the yield range to 0.50%.
– The Bank of Japan should take at least some action, since there is no doubt that the upward pressure on interest rates will increase due to the gap in the monetary policy of Japan and the United States, - said Yusuke Shimoda, senior economist at the Japan Research Institute.
The Federal Reserve is now considering raising interest rates by 50 bps. On Thursday, Fed Chairman Jerome Powell said that this issue is on the agenda of the next FOMC meeting, which will be held in two weeks.
His comment strengthened the dollar and increased the yield of US government bonds. The greenback index still remains above the 100-point mark. And the yield of 5-year bonds exceeded 3% for the first time since 2018.
Meanwhile, today the dollar may receive additional support from the demand for safe havens.
The index of business activity in the US manufacturing sector for April will be published on Friday. If the data raises concerns about the prospects for global growth, it will push the US currency up.
According to forecasts, the USD/JPY pair will continue to rally in the short term. This may be helped by the news about the additional budget, which was agreed on Thursday by the ruling coalition of Japan.
The government of the country has decided to increase budget expenditures to compensate for the consequences of a sharp increase in fuel and food prices for low-income families and small businesses. It is planned to provide them with financial assistance worth $11.7 billion.
The draft, which will be submitted to Parliament for approval in May, also provides for the maintenance of the current fuel subsidy scheme. More than 1 trillion yen will be allocated for these purposes from June to September.
The use of fiscal instruments should be considered only as the desire of the authorities to make life easier for Japanese citizens in times of crisis. This is not an intervention in the foreign exchange market to support the yen.
Additional incentives, on the contrary, may entail additional bond issues. Such a scenario will further increase the world's largest public debt. According to the latest data, this figure is more than twice as high as the annual economic output of Japan.