Sept 11 (Reuters) – Should Bank of Japan policy – which has shaped the yen’s direction for decades – shift, it could influence a big change in FX trading behaviour, but it will take more than interest rate rises for that to happen.
Comments from Bank of Japan (BOJ) Governor Kazuo Ueda that the BOJ could have enough data by year-end to determine whether it can end negative rates have boosted the yen, and with the currency close to a record low on a trade-weighted basis there is certainly plenty of scope for further gains.
That said, the yen is weak for a reason and it’s not just ultra-low interest rates weighing – it is also yield curve control and the vast purchases of bonds needed to maintain that control which have driven the yen down.
While a positive interest rate will help the yen, interest rates in Japan are likely to stay well below those in other major nations.
Rates would have to rise by roughly 2 percent just to match those in Taiwan, which has the lowest interest rate globally excluding Japan. It is very unlikely that Japanese interest rates rise far enough to change yen’s position as the optimum funding currency.
It may not be long before the yen resumes its long-term fall should interest alone be changed. In contrast, an end to bond buys could spark huge changes in portfolios – especially in Japan whose investors have great influence on world markets – which could help to define a long-term low in yen’s value.
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Trade weighted yen https://tmsnrt.rs/3sHI4kG
(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.