Japan has a currency problem, and it's running out of way to stop it. Since the start of December, the yen (NYSEARCA:FXY) has risen about 10% against the U.S. dollar. This has added to deflation problems for Japan, which are partially the reason for its recent foray into negative interest rates. While many were hoping that negative interest rates would help to push down the yen, its rising price has only accelerated since the announcement.
With interest rates already negative, the Bank of Japan (BOJ) has essentially used up a primary tool for subduing the yen. Another important method, "jawboning" where BOJ officials attempt to influence the yen with what they say to the media is also becoming less of an option. But worldwide governments, including the U.S. and even the BOJ itself, have been critical of attempts to jawbone currencies. This is increasing the political difficulty of jawboning for the BOJ.
Further, interest rates in the U.S. (as measured by Treasuries) fell again Thursday after the FOMC minutes release showed that it was unlikely that the Fed would raise the interest rate in April. These lower U.S. rates have made Japanese rates seem less depressed relative to the U.S., further pushing the yen up.
With countries around the globe moving continuously toward "lower for longer" interest rate policies and Japan increasingly seeing its power to influence the yen exchange rate, it is likely that the yen will continue to rise into the foreseeable future; causing the USD/JPY pair to decline.
Events that could change this outlook include a Hawkish Fed, increasing global inflation (especially in the U.S.), increasing Japanese inflation, or increasing global growth. With the Fed increasingly showing itself to be dovish, global inflation continuing to struggle, and Japan being especially susceptible to deflation, I believe the yen will continue to rise for some time.
Disclosure: I am/we are short USD/JPY.
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