Japanese yen stable determined with direction

01/30/2023

1 minute read

2023.01.30 13:01

The Japanese yen gained a little bit on Monday after a quiet week. is up 0.18 percent in the European session, trading at 130.06.

In December, growth slowed to 4.4 percent, down from 4.7 percent a month earlier. However, after three consecutive declines, the month-over-month reading showed a gain of 0.3 percent.

The annualized reading indicates that inflation is more than twice the Fed’s target of 2%, indicating that it is still too early to conclude that inflation has reached its peak. This indicates that, despite clear indications that the economy is slowing, the Fed will likely maintain its aggressive rate policy.

Tuesday and Wednesday are the Fed’s policy meetings, and a 25-bp increase is almost certain. The Fed is still hoping for a soft landing because inflation is slowing and the economy is looking better. GDP grew by 2.9%, which was higher than the 2.6% forecast.

The markets believe that the Fed will cut interest rates at the end of the year, but the Fed hasn’t said so, and Fed Chair Powell has said that the markets are underestimating Fed policy. After the meeting, it will be interesting to see how the dollar reacts.

Inflation indicators in Japan have reached 41-year highs, putting more pressure on the Bank of Japan to end its stimulus program. The BoJ insists that inflation will reach its highest point in March at 3%.

However, the trend we observe from inflation data suggests that this viewpoint is overly optimistic. The fact that Governor Kuroda of the BoJ has stated that he will maintain the Bank’s ultra-loose policy until wages rise indicates that domestic demand drives inflation rather than cost-push factors.

The burning question is whether the new governor will tighten policy, which would likely strengthen the yen, as Kuroda finishes his term in April.