The Bank of Japan (BoJ) stuck with the status quo on Friday, choosing to preserve extreme monetary policy stimulus with the goal of boosting Japanese growth and inflation.
Inflation, which has been the bane of central bankers in Japan for much of the past two decades, remains low. Statistics Japan said in May that annualized headline inflation, or all-inclusive inflation, is running at just 0.4% in the country and that inflation excluding the volatile fresh food and energy components is non-existent (0.0%). As such, the BoJ’s inflation target of 2% is unlikely to be hit any time soon.
The BoJ’s Policy Board chose to maintain its negative interest rate of -0.1% and reaffirmed its target of 0.0% for 10-year government bond yields. The central bank also said that it would not yet make any changes to its ¥80 trillion per annum bond buying program.
The yen fell across the board following the BoJ announcement, adding to steep losses over the past forty-eight hours. Two interesting JPY pairs are USD/JPY and NZD/JPY, which we’ll take a look at now.
USD/JPY has rallied strongly since Thursday’s FOMC meeting (Wednesday in the US and Europe) in which the Fed did as markets had long expected, which was to hike US interest rates by 25 basis points. The Fed also hinted at a further hike to come in 2017 and three hikes in 2018. Rates in the US now stand at 1.25%.
Despite the obvious divergence in the paths of monetary policy between the Fed and the Bank of Japan – the former being in a tightening cycle and the latter maintaining especially loose monetary conditions – the yen has gained more than 5% against the dollar so far this year.
Ordinarily, a divergence of this type would heavily favour dollar appreciation versus the yen. The manifestation of dollar weakness in spite of this condition is indicative of the sheer level of disappointment felt by investors at the inability of the Trump administration to implement highly inflationary policies which were promised on the Trump campaign trail. Trump had promised deregulation, tax cuts and up to $1 trillion in infrastructure spending, none of which have materialized or appear to have concrete plans in place. The US dollar surge in November and December of last year following Trump’s surprise election victory has unwound in 2017.
USD/JPY stands as of writing (04:35 GMT) at 111.20, up 2.2% from lows at 108.80 prior to FOMC.
Given that the US dollar is down on the year versus the yen, one might be tempted to assign an “undervalued” label to the USD/JPY pair and load up on longs. This would be unwise, however, according to Bank of America Merrill Lynch (BAML) who still argue that “self-sustained USD strength will need more time to materialize.” The bank said today that they “prefer being long NZD/JPY for now.”
Of the FX majors, the kiwi had been the strongest performer versus the US dollar in May and throughout early June, supported by improving trade, strength in dairy prices and record highs in US stocks (indicative of receding market risk), but the currency took a turn for the worse yesterday after New Zealand GDP data came in below market expectations.
While readers should be cautious of this broad kiwi turn, which is ongoing as of writing, it is not at all noticeable versus the Japanese currency, which over the past twenty-four hours has been even weaker than the New Zealand dollar. As of writing, NZD/JPY stands at 88.20, up 1.6% from yesterday’s low.
Simply, if BAML are to be believed, the yen will soon fall in value against the New Zealand dollar, and for this reason, readers in Japan in need of New Zealand currency sometime this year, whether in the form of travel cash or for international money transfers, would do well to change their money now, or at least change sooner rather than later. By changing money today, holders of Japanese yen would position themselves ahead of any depreciation in their currency’s value and maximize its buying power.
As always, readers can get their hands on New Zealand dollars at exchange rates far better than those available at a typical bank or Bureau de Change by using BestExchangeRates’ online comparison calculators for NZD travel cash and NZD foreign currency transfers.
Author: Joel Wright
You can get in touch with Joel via email here or via the contact page.