The yen has traded sideways within a ¥10 range against the dollar since the end of 2014. During the first half of 2015, the yen continued to weaken against the dollar, with USDJPY rising to a high of just below ¥126 in June, before commencing a decline which saw the pair eventually move 975 pips lower to test support at ¥116.
The yen’s price is a function of two diametrically opposed factors; on the one hand, the Bank of Japan (BOJ) is undertaking a massive bond buying program in an effort to stoke inflation, which serves to weaken the yen, and on the other hand, the yen appreciates abruptly on financial and geopolitical uncertainty.
The market and analysts alike have been speculating for many months about the prospect of the BOJ extending their QQE program. The primary reason for them doing so would be to boost underlying inflation, the best measure of which is CPI excluding food & energy.
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Kuroda and the BOJ have said on numerous occasions that they have the capacity to ease policy further if they see fit, but Kuroda has also been adamant that underlying inflation has been trending higher – and this was true, until the figures for October were released; Tokyo-area CPI excluding food & energy rose only 0.1% for October, while the year-on-year figure ticked down 0.2% from 0.6% in September to 0.4%. The failure of core-core inflation to maintain its upward trend will be on the BOJ’s radar and if November’s figures show another lacklustre result, then chances of action by the BOJ on December 18 will increase.
The BOJ has kept monetary policy unchanged at every meeting throughout 2015, including at the most recent on November 19. In the semi-annual Outlook Report, released on October 30, the BOJ downgraded both GDP and CPI forecasts, and pushed back the 2% target for CPI until the second half of 2016. By having a later target date for inflation to reach 2%, the BOJ has more time to wait and monitor CPI for any moves higher. This decreases chances of the BOJ easing further in the near term.
Preliminary GDP for the third quarter, released November 15, printed at -0.20%, equating to a contraction of 0.80% in annualised terms. This was lower than expected and marks the second consecutive quarter of contraction, indicating that Japan is technically in a recession. Growth in the second quarter was -0.40%. The lacklustre growth, coupled with new signs of weakness in underlying inflation, suggests that the BOJ will eventually be forced to expand their current quantitative easing program.
The two most ideal situations to trade the yen are: to buy it when there is substantial risk-off sentiment in the market, such as a major terrorist attack, natural disaster or equity market sell-off, or to sell it if and when the BOJ announce further easing. Outside of these two situations, trading the yen can be difficult in the current climate. The fundamental bias however remains to the downside so long as inflation is low and the BOJ maintain their QQE program.