Those who trade forex can benefit from knowing about how the US dollar recently surged to its highest level in more than five years against the yen, and the circumstances that surrounded this situation.
The greenback recently appreciated to its highest value relative to the yen since October 2008, rising to 104.64, Reuters reported.
USD/JPY – Central Bank Stimulus Key to Exchange Rate
The decisions made by the central banks of both the United States and Japan relative to their use of quantitative easing are a major factor that has been cited as having an impact on the exchange rate for the currencies of these two nations, according to Bloomberg.
Markets responded to an announcement made by the Federal Reserve that the financial institution would taper its current pace of bond purchases starting in January 2014. Global market participants had been waiting for the nation’s central bank to specify the timeline it would use to lower the pace of these transactions since Federal Reserve Chairman Ben Bernanke stated back in June that this form of stimulus could be reduced as soon as 2013.
He made this statement at the end of a policy meeting held by the Federal Open Market Committee, and also said that quantitative easing could potentially be eliminated altogether as early as 2014.
BOJ Maintains Current Policy
While the Fed indicated specific plans for reducing its stimulus at the conclusion of the most recent FOMC meeting on Dec. 18, the Bank of Japan recently announced on Dec. 20 that it will keep its existing regimen of stimulus in place in an effort to meet a goal of 2 percent annual inflation, the media outlet reported. The BOJ made this announcement after a two-day meeting conducted in Tokyo was finished.
Haruhiko Kuroda, governor of the BOJ, has stated that he isn’t trying to achieve a specific value for the USD/JPY or other currency pairs that involve the yen, according to the news source. However, at the end of the central bank’s latest meeting, his board reiterated its prior promise to add between 60 trillion ($580 billion) and 70 trillion yen ($670 billion) to the nation’s money supply every year.
Amid this robust stimulus, the currency of the Asian nation has experienced some depreciation, and most of the companies taking part in a recent Reuters poll predicted that within the first six months of next year, the BOJ will push the yen lower in value. The decline that this currency has experienced has helped provide tailwinds to economic conditions in Japan, Kurodo has asserted.
“The correction of an excessively strong yen has been a plus for Japan’s economy,” Kuroda told members of the media following the conclusion of the BOJ meeting, according to Bloomberg. “Corporate profits have been boosted, sentiment among economic players has turned positive, stocks have risen and growth has accelerated.”
While the progress that the nation’s economy has made recently is apparently not enough to get the BOJ to reduce its stimulus, the most recent report provided by the U.S. Commerce Department on the nation’s third quarter gross domestic product growth helped support the strength of business conditions in the world’s largest economy, Reuters reported. The latest estimate provided by the government agency revealed that during the three-month period, the nation’s economy grew at an annualized rate of 4.1 percent.
While the FOMC did announce that the current rate of bond purchases will be reduced starting in January, the group of officials released a statement indicating how the U.S. economy will be bolstered by the continued transactions, according to Bloomberg.
“The committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery,” the FOMC said, the media outlet reported.
USD/JPY – Fed Announces Tapering Plans
As a result of these purchases made by the Fed, the balance sheet of the financial institution recently surpassed $4 trillion, according to the news source. Bernanke has emphasized that given the current situation, the Fed could slowly decrease the amount of stimulus that is used.
Economists taking part in a recent Bloomberg News poll predicted that during the next seven policy meetings held by the Fed, the financial institution will likely lower the current stimulus by $10 billion at every one of these events.
In addition, those who trade forex might benefit from knowing about the results of a separate survey conducted by the media outlet, in which 27 out of 35 market experts predicted that after April, the current stimulus used by the BOJ will be increased. Of the individuals who participated, only two predicted that when the fiscal year that ends on March 2016 is over, the the BOJ will have succeeded in reaching its 2 percent annual inflation target.
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