When you live somebody else's life, you eventually forget about your own. The Bank of Japan shifting policy framework to target the yield curve at the end of 2016 led to the fact that the yen became sensitive to changes in the rates of the US debt market, ignoring the macroeconomic statistics of the Land of the Rising Sun, the dynamics of local stock indices, the divergence in monetary policy, the high global appetite for risk, and low volatility of financial markets. The key factor in the change in USD/JPY was the yield on 10-year US bonds, but in 2018 the situation may change.
This will be remembered not only by the crazy rise of bitcoin, but also by the shift in the worldview of the world's leading central banks. The ECB, BoE and BoC began to normalize monetary policy, and the former two regulators managed to raise the basic rates. The BoJ deliberately avoided talking about defeating deflation, fearing to make the same mistake as Mario Draghi in Portuguese Sintra. As soon as the head of the European Central Bank used the word "reflation", the euro buyers formed a queue. But the consumer price index in Japan has been steadily growing over the past 12 months, labor costs have recovered from the long-term bottom, and the GDP deflator has finally emerged from the red zone.
Technically, the BoJ is already dismantling QE by buying a smaller volume of assets. As part of the inflation targeting policy, they do not need that much! Moreover, Haruhiko Kuroda spoke about the "reversal rate" twice in the last couple of weeks. This term refers to the situation when ultra-low rates of the debt market lead to losses of banks, and those, in turn, can no longer lend to the economy and contribute to the growth of inflation. If the Bank of Japan nevertheless decides to get on the track of normalizing monetary policy, the yen will cease to react solely to the yield of US Treasury bonds, and its close correlation with gold will be history.
Dynamics of the USD/JPY and gold
When will this happen? Hardly before the second half of 2018. The October forecasts of the regulator for core inflation (+0.8% for 2017/2018 and +1.4% for 2018/2019) make one doubt its early activity, and Kuroda's words about the reversal rate may be interpreted as his reluctance to expand the package of monetary incentives. In this regard, ING's forecast for the growth of USD/JPY to 115 in the first quarter of 2018 amid the implementation of the tax reform in the US and the increase in rates for 10-year US bonds from 2.3% to 2.6-2.7% does not look utopic.
In the short term, the dollar can benefit from its own "bullish" drivers. Strong statistics on the US labor market in November can become a catalyst for the pair's growth. First of all, traders should pay attention to the average wages. At the same time, the potential for the USD/JPY rally against the background of the growing risks of the Bank of Japan's transition to normalization of monetary policy looks limited.
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