The consumer price index (CPI) has remained below the BOJ (Bank of Japan) target for many years. Neither budget incentives, nor the giant QE program, nor negative interest rates helped the financial regulator to achieve the target level of 2%. All the efforts of the Bank of Japan affect only industrial inflation due to the weakening yen exchange rate.
Against this background, talking about tightening the monetary policy in the coming years is inappropriate. On the contrary, the latest data suggests that the BOJ may turn on additional stimulus. Thus, in December 2018, consumer inflation slowed to 0.7% over the same period last year.
Consensus analysts forecast suggests that in 2019, the BOJ will be forced to reduce unrealistic inflation target. It is not a question of curtailing the pace of the asset repurchase program and raising negative interest rates.
Thus, Tokyo will continue to stimulate domestic producers and industrial inflation through a gradual devaluation of the yen.
Deflationary pressure on the yen is not so much in the monetary field, as in the demographic one. The fact is that the population is gradually aging. Older people tend to have much less incentive to consume; they rarely buy new real estate, they are less mobile. The constant drop in demand with a high level of competitiveness of the economy stimulates deflationary pressure. The Bank of Japan simply could not influence this factor and turned on the printing press from despair. With the high rates of population aging, Japan remains one of the most closed countries for migrants who could improve the country’s demography. As a result of this policy, among the G7 countries, Japan has the worst figures for reducing the working population. The population of Japan is also declining – since 2010, the Japanese have decreased by 1.3 million, which translates into a reduction in domestic demand for Japanese goods and a long-term crisis in the construction industry.
Data leads FT with reference to the IMF:
Also, the yen rate should be considered in the context of the monetary policy of Japan’s largest trading partners, who, with varying degrees of intensity, are heading towards a tightening of monetary policy.
According to the consensus forecast, the US Federal Reserve will raise the key interest rate 2 times in 2019.
The ECB since 2019 has stopped the asset repurchase program (QE). According to the consensus forecast, the first increase in interest rates may occur in the second half of 2019.
What does this mean for USD/JPY
After strengthening the dollar from 76 yen in 2012 to 125 in 2015, the pair USD/JPY lay in a long-term side trend, which has the shape of a triangle. The last wave of JPY strengthening within the framework reached its climax on January 3 during a false breakdown of support within the triangle.
The strengthening of the yen was provoked solely by a sharp collapse of the US stock market in the second half of December. The Japanese currency, along with gold, are traditional defensive assets during market disasters.
Judging by the latest statistics from the United States, China, and the EU, as well as the most powerful start of the year for the S&P 500 in 13 years, there is no talk about any Global crisis in 2019. In this regard, the emotional factor will gradually lose the role of support for the JPY. After solving the problem of shutdown in the US, the yen will lose the last major fundamental support.
This will open the way for the strengthening of the dollar from the current 109.6 to the upper boundary of the triangle near 113. In the case of a successful breakthrough of resistance, the dollar is likely to rush to new long-term highs above 125 yen per unit. The emergence of a certain global crisis or a radical change in the economic policy of the Bank of Japan can only lead to a long-term reversal of the yen. But this is not the case yet.