Is the Bank of Japan’s Latest Decision a Wise Move?

The Bank of Japan (BoJ) has either made a “fateful miscalculation,” as Goldman Sachs said – or made a tactical decision to stun markets by holding interest rates in April.

Not only did BoJ continue its -0.1% deposit rate and its 80 trillion yen ($800 billion) base money target, they also cut its inflation and economic growth forecasts for 2016-17.

While there’s ample reasons for concerned parties to be frustrated by BoJ’s inaction – currency traders be they binary option or traditional forex investors are excited by the potent volatility of the USD/JPY currency pair.

Analysts Surprised & Disappointed

Market watchers had predicted that stimulus measures would be introduced on par with the magnitude of Japan’s fiscal issues but BoJ astonished everyone by taking no action and essentially calling for patience. For years BoJ has been promising to do whatever it takes to push inflation toward 2%

The yen – already way up in recent months – rallied further. Of course, equity markets plummeted. Some analysts believe that the BoJ decision wasn’t an error at all but a tactical one. As everyone was expecting a move, the BoJ likely preferred to wait for maximum effect and not satisfy investors who sought to pressure the bank.

Is BoJ timing their move to coincide with the probable US Federal Reserve’s summer rate rise? Or is the BoJ trying to pressure the government to make wider economic adjustments? There’s no way to be absolutely sure but such tactical decisions could be dangerous as Japan’s larger strategic goals seem muddled – which shakes the confidence of citizens and investors alike.

While the Japanese government is expected to reveal new steps in May about the time of the G7 summit (which will be in Japan), there’s little optimism that big reforms will be initiated.

USD/JPY Now Super Volatile

As far as more practical matters – global markets have reacted, with the Nikkei index down about 8% since the BoJ pronouncement. As far as the Japanese yen – it quickly gained ground after the meeting. That trend is continuing as the US dollar dropped below ¥106 – the lowest since September 2014 and below the ¥111+ before the BoJ decision.

Nevertheless, some experts think that this is a currency crisis in the making. After all, Japan has an export-based economy – so a Japanese manufactured car that sells for $20K that would ordinarily make ¥240,000 a few months ago (after paying employees and suppliers in weaker yen) is now a car that will only make ¥216,000 – ultimately erasing all of their profit on the vehicle.

Analysts believe that the USD/JPY will continue tumbling in the near-term but will eventually climb considerably higher. This volatility is very likely to continue and will affect the two entwined currencies for some time until the BoJ decides to pull the trigger and use its ammo to make adjustments – or until the Japanese government reforms its runaway economic policies. In the meantime – the BoJ seems to be content in just keeping their gunpowder dry.

The Bottom-Line for Currency Traders

Currency traders are going to have a field day for the next several months as the fluctuations in USD/JPY continue. As profits can be earned whether this currency pair goes up or down – many investors are already taking advantage of the ongoing volatility.

Naturally, there are other factors that can affect USD/JPY including a wide-variety of capital and asset markets, sectors, commodities, indices, stocks, etc. These numerous factors only adds fuel to the already flammable volatility and to the conducive trading environment.


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