As usual during a period of high uncertainties and growing fear of recession, investors pile into safe-haven assets, such as the Japanese yen, sovereign bonds and the Swiss franc, while dumping riskier assets such as equities and EM currencies. Unfortunately for the Bank of Japan, this situation is far from being convenient as it goes completely against what the Central Bank has been trying to achieve since it decided to implement its Quantitative and Qualitative Easing back in 2014. Since the beginning of 2016, the Japanese yen has appreciated almost 8% against the US dollar. Besides its safe haven property, the rise is mostly due to the combined effect of the market’s fading confidence in the BoJ’s ability to create a weaker yen but also the belief that the Fed will be unable to go on with its rate hike cycle as the global growth outlook worsens - Yellen has hinted that market turmoil may further delay the rate hike cycle.
However, it is worth noticing that the BoJ has a share of responsibility in the strengthening of the yen. At the end of January the Bank of Japan voted to adopt a negative interest rate policy (NIRP), hoping that it would help to keep the yen at low levels and even increase pressure on currency. Initially, the market reacted accordingly by pushing USD/JPY to 121, up 2.5%. However, when market participants realised that the -0.1% interest rate was going to be applied to a ridiculous part of the total current account balances (the policy rate balances), while the two other main parts (basic balance and macro add-on balance) are not subject to negative rates (+0.1% and 0.0% respectively), they piled into the yen even more than before.
The BoJ’s decision to implement a half measure, which was clearly seen as a sign of weakness by market participants, adds to the concern that central banks across the globe are struggling to bring inflation to their respective inflation targets. In addition, the ECB council’s refusal to massively increase the QE back in December and now the BoJ’s decision to just cut rates suggests that central banks across the globe began to question whether the implementation of new stimulus would allow a return to sustainable positive inflation and solid economic growth.
A fresh batch of economic data from Japan is due next week and will shed more light on the health of the economy. For now, USD/JPY remains stable, between 112 and 112.50. We believe there is still some downside potential for the pair; however traders are still trying to understand what happened yesterday - when USD/JPY spiked two figures in less than 5 minutes - and will likely remain sidelined before the weekend break.