It will be difficult for the Bank of Japan to tighten monetary policy

14 September 2023 134
It will be difficult for the Bank of Japan to tighten monetary policy

The USDJPY currency pair started the current week with a sharp decline. The prices dropped from the annual high of 148 to 145.9 before the downward movement stopped. Indicatively, the bears failed to build on this success. On the contrary, the dollar began to actively recover against the yen. At this rate, a return to the 148 level will be possible in the coming days.


Yesterday's U.S. inflation data for August helped the American currency to strengthen its position. Price growth accelerated more than expected, from 3.2% to 3.7% against analysts' consensus forecast of 3.6%. Core inflation fell from 4.7% to 4.3% year-on-year as it was predicted. On the contrary, core price growth accelerated from 0.2% to 0.3% month-on-month. The released statistics confirms the need to keep interest rates high in the U.S.


Meanwhile, BOJ Governor Kazuo Ueda attempted to support the yen. During his speech, he stated that the decision to cancel the negative interest rate policy may already be made at the end of this year or at the beginning of the next one. Market participants did not expect such a rapid decision to tighten monetary policy, so on Monday there were massive purchases of yen against almost all other currencies. However, real steps to increase the key rate will be much more difficult to make than to announce them.


Hiroshige Seko, one of the most influential members of Japan's ruling Liberal Democratic Party, considers Ueda's comments too hasty. According to Seko, the country's domestic inflation rate is not yet high enough to justify key rate hikes. Apparently, there are other Japanese officials interested in maintaining ultra-loose monetary policy. Therefore, the current BOJ Governor still has a lot to do to convince his opponents that his view is correct.


To open long positions on the USDJPY currency pair, it is better to wait for a slight pullback, e.g. to 146.5. The growth target will be the 148 level.

 


The following trading strategy may be offered:


Buy USDJPY in the range of 146.5–147. Take profit – 148. Stop loss – 145.8.


Traders may also use the Trailing stop instead of the fixed Stop loss at their discretion.

This content is for informational purposes only and is not intended to be investing advice.

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