Unlike european currency, which is quite resistant to hawkish Fed comments, Japanese yen substantially weakened against the US dollar while heightened geopolitical risks on the Korean Peninsula helped bears to pare down some losses. Verbal skirmish between Washington and Pyongyang once again revived appeal of safe heavens for investors. Despite the fact that almost no one believes in the war, there are risks that things may go completely wrong.
Japanese currency clearly remains sensitive to changing sentiments ahead of Fed December tightening especially after the transition of BoJ to the policy of targeting the yield curve. In this respect, rising chances of December hike from 33-34% to 73-74% became a foothold for the upward movement in USD/JPY. The Federal Reserve sees a rate of 2.1% and 2.7% by the end of 2018 and 2019, while the majority of Bloomberg experts are convinced that with the current monetary policy parameters, the Bank of Japan will never be able to achieve an inflation target of 2%. Despite a strong labor market and impressive GDP growth in the second quarter, consumer prices froze at around 0.4%.
The BoJ position, which predicts inflation growth of 1.1% in the current and 1.5% in the coming financial year, looks too optimistic. This is also understood by Shinzo Abe, who is not tired of putting new “doves” in the chairs of the Board of Governors. One of them, Goshi Kataoka, said that the current measures of monetary expansion are not enough to realize the set goals. In the end, the Prime Minister can replace Harukiko Kuroda, whose term of office ends in April.
Obviously, only one thing the Bank of Japan is not going to abandon is the ultra-soft monetary policy. Its balance, unlike the balance sheets of other leading central banks of the world will continue to grow. Among other major central banks BoJ seems to be a black sheep and without the “help” of geopolitical and political risks, the yen could be considered as the main outsider of the G10.
In my opinion, if you bet on the divergence in monetary policy, it is better to buy EUR/JPY than USD/JPY. It is possible that in 2018-2019 the Fed’s monetary policy normalization cycle will end, while the ECB will start raising the rate only by the end of next year. Sluggish reaction of the market to the skirmish of the US and North Korea testifies to the development of immunity, and only the beginning of military operations can become a signal for the “bull” trend in the yen.