I’ve written extensively about the Japanese yen (JPY) this year and why it is on a bearish trend. Here is the last article, just after the Bank of Japan announced its latest monetary policy decision.
Many traders consider it inevitable that the Bank of Japan will eventually change its monetary policy course. After keeping it very loose, the time will come for the Bank of Japan to follow other central banks in tightening the monetary policy.
After all, inflation is on the rise in Japan too. For instance, the recent Opinion survey on the General Public’s Views and Behavior showed that 94.5% of respondents consider that the price levels have risen.
Food prices, for instance, were higher in March 2023 compared to September and March 2022. The same goes for eating out or daily necessities.
But despite evidence of rising local price levels, the JPY bearish trend is unlikely to change. That is particularly true for the USD/JPY for at least two reasons:
65+ years segment to increase
Monetary policy divergence
More Japanese to live more than 65 years despite future population decline
One of the reasons why the JPY is in a long-term bearish trend is demographics. Japan’s population is projected to fall to 87 million by 2070, and the most striking thing is that people aged 65 and over will make up 38.7% of the population.
The problem with this statistic is that older people do not spend money as younger ones do. The older we get, the more careful we are with finances – it’s a fact.
Hence, for inflation to rise, spending must increase. However, spending is unlikely to increase as the Bank of Japan wishes, so tightening the policy will be difficult.
Monetary policy divergence
The Federal Reserve of the United States and the Bank of Japan are on divergent paths. The former raised the funds rate above 5%; the latter still eases the monetary policy by running a tight yield curve control system.
Now let’s suppose that the Fed decides to cut rates this year. It will do so only if inflation comes down to its 2% target.
But if that happens, it means that inflation in Japan will decline as well because the United States is exporting inflation/disinflation worldwide as the world’s largest economy. Hence, the Bank of Japan will have no room to hike rates, but it will probably need to ease some more.
Summing up, any JPY strength should be viewed as temporary as odds favor more weakness. USD/JPY, in particular, looks bullish in the medium and long term.
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