- The USD/JPY exchange rate remains stable due to stalled trade talks.
- Market volatility may increase as trade negotiations near their deadline.
- BoJ bond purchase reduction could impact yen, with details due in June.
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For over a month, the exchange rate between the US Dollar and Japanese yen (USD/JPY) hasn’t changed much because there haven’t been any major events influencing it. The main issue is the stalled trade talks between Tokyo and Washington.
Even with reports of progress, a final agreement seems far off, and the deadline for discussions is approaching. In the next few weeks, regardless of whether there is progress, the market will need to consider different outcomes, which might cause more changes in the exchange rate.
Meanwhile, the Bank of Japan is likely keeping interest rates the same, though experts think there might be a rate hike later this year.
Is the BoJ Planning to Cut Back on Bond Purchases?
Due to its long-term program of buying government bonds to manage interest rates, the Bank of Japan now owns about half of Japan’s government debt. This means they have to be very careful with their actions to avoid causing a big rise in bond interest rates, which could lead to a debt market crisis. If the Bank of Japan suddenly stopped buying these bonds, their prices could fall drastically, leading to a sharp increase in interest rates.
The Bank of Japan has announced plans to slow down its bond purchases starting next fiscal year. They are considering several options, with the most talked-about being a reduction of 200-400 billion yen each quarter. More details should be provided after their next meeting in mid-June. If the market is surprised by how much they decide to reduce, it could cause the value of the Japanese yen to drop.
Japanese Macroeconomic Data Suggests Potential for Rate Hikes
The Bank of Japan uses inflation rates and GDP as its main economic indicators. Recent data suggest that another interest rate increase in the second half of the year is possible. In May, the Consumer Price Index (CPI) showed an annual inflation rate of 3.6%, which is well above the target level.
Yesterday, the GDP data was released, showing a growth rate of 0%. While not impressive, this figure was higher than expected and beat market predictions for the first time since February.
USD/JPY Pair Stuck in Consolidation
The USD/JPY currency pair is currently stable, moving between 142 and 146 yen per dollar in the short term.
The currency pair is also consolidating within a broader range, between a low of 140 yen and a high resistance level of 148 yen per dollar. If the exchange rate climbs above 146 yen, the main expectation is that it will reach 148 yen, with potential support holding around 142 yen per dollar.
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