USD to JPY: Why the Japanese Yen Could Surge Against the U.S. Dollar
The Japanese yen may have fallen from grace as the Bank of Japan went ultra-easy with its monetary policy. But things started to change as the USD/JPY pair started to move downward, showing the yen’s strength against the U.S. dollar. The U.S. Federal Reserve’s dovish tone recently added fuel to the fire.
The Fed’s stance has been a catalyst for the Japanese yen as of late. Fed Chair Janet Yellen spoke at the Economic Club in New York on Tuesday. While a number of Fed people have been calling for rate hikes as early as April, Yellen is not a fan of the idea. She said that the Federal Open Market Committee (FOMC) would “proceed cautiously in adjusting policy,” and that caution “is especially warranted.” (Source: “The Outlook, Uncertainty, and Monetary Policy,” Board of Governors of the Federal Reserve System, March 29, 2016.)
Although the Fed has raised interest rates for the first time since the financial crisis, another rate hike might come later than you think. Laura Rosner, U.S. economist at BNP Paribas, predicts no interest rate increases in 2016 or 2017. (Source: “Yellen Takes Control of Fed Message to Stress Gradual Approach,” Bloomberg, March 29, 2016.)
Yellen has specifically mentioned the strength of the U.S. dollar in recent years. If the dollar were to appreciate further, it would be bad for exports and U.S. manufacturing.
Speaking of exports, don’t forget that they have been a major factor behind the Japanese yen’s safe haven status. As a leading manufacturer of consumer electronics and automobiles, the country’s competitive advantage has built a vibrant export sector. The demand for Japan’s exports provides strong support for the currency.
The best illustration of the yen’s safe haven status would be its performance in the last financial crisis. From June 2007 to January 2009, the USD to JPY exchange rate declined from 123.85 to 90.73. This means the yen appreciated 26.7% against the U.S. dollar in a year and a half.
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