Bank of Japan has become the weakest link during the tightening cycles of monetary policy from 2021 to 2023. While the Federal Reserve and the Reserve Bank of New Zealand raised rates by 525 basis points, the Bank of England by 515 basis points, the Bank of Canada by 475 basis points, and the ECB and the Bank of Norway by 450 basis points, the BoJ did not move at all. As a result, the yen turned out to be the main underperformer among G10 currencies in 2023. Surprisingly, in 2024, its depreciation continues.
Scale of monetary policy tightening by the world's central banks
At the end of last year, there were loud promises to the Japanese currency. Allegedly, sitting on the sidelines of the Bank of Japan indefinitely was not an option. Ultra-loose monetary policy creates serious imbalances in financial markets; it needs to be normalized, especially when inflation has exceeded the 2% target for twenty months.
Kazuo Ueda and his colleagues were cautious, indicating that only after wage hike negotiations in the spring would the BoJ abandon negative interest rate policies and lift bond yield curve control. In the end, the central bank cornered itself. Trying to wait for one event, it missed the slowdown in inflation.
Dynamics of Japanese bond yields
In January, the pace of consumer price growth in Tokyo, a leading indicator for the national CPI, dropped to 1.6%, with the Reuters consensus estimate at 1.9%. This is the minimum level since March 2022. The decline creates problems for the Bank of Japan. If it is about global deflationary processes, Japan risks returning to old problems—deflation and a lost generation. As a result, Tokyo's monetary policy will remain ultra-loose, and the yen, which was expected to be a favorite in 2024, will turn into its main disappointment.
However, it is essential to remember that there are always two currencies in any currency pair. The rally in USD/JPY is driven not only by investors' doubts about the BoJ's abandonment of negative interest rate policies but also by the rise in yields on U.S. Treasury yields. The expansion of the U.S. GDP by 3.3% in the fourth quarter became another proof of the economy's resilience to the most aggressive monetary restriction by the Federal Reserve in decades. Now, the fate of stock indices and the U.S. dollar is in the hands of Fed Chairman Jerome Powell and his colleagues.
On the one hand, lowering the federal funds rate in March seems premature; however, high real yields on bonds will slow down the economy. Moreover, if inflation reaches the 2% target in the coming months, what's the point of keeping borrowing costs at 5.5%? Dovish signals from the Federal Reserve are a reason to sell USD/JPY.
Technically, on the daily chart of the analyzed pair, there is consolidation in the range of 146.7–148.7. Only a breakout of quotes beyond this range will determine the further direction of USD/JPY. An aggressive strategy involves selling the U.S. dollar below 147 and buying above 148.35.