what will happen to FX market next?with International banking turbulences intensify (02)
2. Analysis of the trend of the USD/JPY exchange rate from Q2 2023
In the first quarter of 2023, the USD/JPY exchange rate generally fluctuated within the range of 127 to 138 (see Figure 7). On the whole, there was a strong correlation between the exchange rate of USD/JPY and the strengthen tendency of the U.S. dollar index.
Compared with the sharp depreciation of the yen-dollar exchange rate throughout 2022, the yen-dollar exchange rate experienced a valued pattern in Q1 2023. The exchange rate of the yen against the U.S. dollar rose from 150.14 on October 20, 2022 to 134.13 on April 18, 2023, with an appreciation rate as high as 10.7%.
Overall, the Japan-U.S. interest rate gaps, were the main driving forces contributing to the fluctuations on exchange rate between the Japan yen and US dollar. In 2022, the Bank of Japan implemented a set of loose monetary policy to stimulate economic growth, which led to the continuous deviation on the directions of monetary policies between Japan and the United States. Moreover,Under the influence of the US Fed’s steep rate hike process, the interest rate gaps between Japan and the United States expanded significantly, which caused a sharp depreciation of the yen against the dollar. On December 20, 2022, the Bank of Japan adjusted the yield curve control policy (YCC) triggering alterations in the yen exchange rate.
In the first quarter of 2023, changes in the exchange rate of the yen against the dollar,was still highly affected by ajustments in the interest rate differentials between Japan and the United States (see Figure 8). On December 20, 2022, the Bank of Japan adjusted the yield curve control policy (YCC) target from ±0.25% to ±0.5%, that is, when the yield of Japan’s 10-year government bonds exceeded 0.5%, the Bank of Japan started to purchase 10-year Treasury bonds until it returned to the target range of 0.5% . After the introduction of this policy, the Japanese 10-year government bond yield continuously exceeded 0.25%. From December 20, 2022 to April 18, 2023, the average yield of Japanese 10-year government bonds was 0.46%, and the spread between Japan and the United States generally fluctuated within the range of -2.8% to -3.6%.
Thus,in forseeable future, changes in the monetary policies of the Bank of Japan and the US Federal Reserve,will potently influence the changes in the interest rate differential between Japan and the United States, which in turn will decide the US dollar VS Japan yen exchange rate relatively.
First, in 2023, the Bank of Japan’s monetary policy will largely continue the pattern of 2022,Barring accidents. On April 9, 2023, Kazuo Ueda, the new governor of the Bank of Japan, officially assumed office. Judging from Ueda Kazuo’s position at the press conference, the current monetary policy remained unchanged in the short term. On April 28, 2023, the first monetary policy meeting of Kazuo Ueda, the new governor of the Bank of Japan, decided to continue to maintain the current monetary policy unchanged, thus keeping the benchmark interest rate at -0.1%, and proceeding to implement quantitative easing (QE) and yield Curve Control (YCC), in order to achieve inflation stability goals.
However,considering Japan’s current inflation and economic growth realities, we cannot dogmatically rule out the possibility of the Bank of Japan adjusting its monetary policy in near future.On one hand, Japan’s inflation rate is at a high level, which may have an impact on its monetary policy. Mainly affected by rising import cost prices, from January 2022 to March 2023, Japan’s CPI rose from 0.5% to 3.2% year-on-year, which was aove the Bank of Japan’s inflation target for 12 consecutive months. In January 2023, Japan’s CPI reached a historical high of 4.3% year-on-year that month, the highest level since 1981. From January to March 2023, Japan’s CPI was 4.3%, 3.3%, and 3.2% year-on-year respectively (see Figure 9). On the whole, in the first quarter of 2023, Japan’s CPI showed a trend of sharp rising and falling, but it was still higher than the Bank of Japan’s 2% inflation target. In the April 2023 “Economic Activity and Price Outlook” report, the Bank of Japan stated that it will continue to expand the size of the monetary base until the actual year-on-year increase in CPI stabilizes above the inflation target. On the other hand, Japan’s GDP growth rate is still at a low level. In 2022, Japan’s quarterly GDP was 0.9%, 1.5%, 1.1% and 1.6%, respectively. Also In the “World Economic Outlook” report released by the IMF in April 2023, it predicted that Japan’s economic growth rate will be 1.3% and 1% in 2023 and 2024, respectively. In addition, in 2023, Japan’s trade deficit in goods continued to widen. Japan’s trade deficit in goods reached 3.1 trillion yen in January 2023, the largest trade deficit in goods since 1996. The rise in Japan’s import costs is the main reason for the widening trade deficit in goods. In January 2023, Japan’s import volume reached 10 trillion yen. In February 2023, Japan’s trade deficit in goods eased to 600 billion yen.Thus In general, in order to stimulate economic growth and stabilize prices, the possibility of the Bank of Japan adjusting monetary policy in the coming period cannot be ruled out.
Second, under the influence of the turmoil in the international banking industry, as a matter of fact,the Federal Reserve is facing a trade-off between stabilizing growth and finance when formulating monetary policy. However, the current inflation in the United States is relatively viscous, and the inflation upward momentum mainly rooted in labor services and real estate rents sections,namely the rising wage costs caused by the tight labor market. Therefore, it is unlikely that the US inflation rate will decline rapidly in the short term. At least,The Fed may raise interest rates 1–2 times, 25 basis points each time. Even if the Fed not raise interest rates in the future, it will be difficult to cut interest rates in the short term. In other words, the U.S. monetary policy will remain tight for some time to come with fairly high probability .
To sum up, there is a high probability that the Bank of Japan and the Federal Reserve will continue the current monetary policy pattern from Q2 2023,as a result, In the second quarter of 2023, the USD/JPY exchange rate will roughly fluctuate within the range of 125 to 135.
