Where will the yen's strength lead?

From the beginning of 2018, we can see the downward trend of the USD/JPY pair. However, the significant rise of the yen started since the Friday, February 9. Today the yen could hit the lowest level of 107.29 since October 2016. The next support is at 106.70, and the USD/JPY is not far from it now. The resistance is at 109.30, but it is quite far from the current price.

Such strong positions of the yen create worries about the Japanese economy and the future of the monetary policy.

Earlier we expected the normalization of the Japanese monetary policy based on strong economic growth, firm inflation growth and the rise of global bond yields. According to the Bloomberg survey, almost the half of experts expected the first step to the normalization even this year.

Nowadays, the economy of Japan suffers from the slowest growth in two years. Today Japan released its GDP data. So Japanese economy grew at an annualized rate of 0.5% in three months through December. It was a decline from more than 2% in each of the previous two quarters. However, it is worth to mention that the GDP data was not so bad. Exports are strong in the fourth quarter, but the rise of imports happens as well. At the same time, private consumptions and business investment increased. But the too strong yen can slow down the developing of these positive tendencies.

The yen has the strongest positions in 15 months. Although it is clear that the yen’s rise will not affect economic growth or corporate activity in the short-term, it can lead to the continuation of the BOJ easing policy because such indicators make it harder to reach the 2% inflation goal.

So as we can see the strong yen and the weak economic growth create problems for the Japanese monetary policy.

However, as we know, it cannot be only one point of view.

Despite the fact that the yen looks really strong against the US dollar, according to the JPMorgan Japan CPI-Based Real Effective Exchange Rate (yen rate is adjusted for trade and inflation), the yen is not as strong yet. The Japanese currency still has not reached heights of 2016. So it has space to move up. It means that the growth of the Japanese currency cannot affect the possibility of the normalization of the monetary policy as soon as this year.

Source: Bloomberg

To sum up, we can say that too strong currency is always not good for the economy and a central bank tries to loosen it. However, the strength of the yen is a controversial question. On the one hand, we can see the strong appreciation of the yen against the US dollar. On the other hand, in general, the yen growth is not so strong. So we still can expect first steps to normalization of the BOJ monetary policy, but if the USD/JPY pair reaches crucial levels of 105 or 100, the BOJ should start worrying.