March 18th 2024 forecast: 104.4
JPY Faces Downside Risks as BoJ Cautiously Normalises Policy
The Japanese yen (JPY) has experienced increased volatility in recent weeks, with the USD/JPY pair reaching a low of 148.03 on March 15, 2024, before rising to 149.63 on March 19. Trading Economics forecasts the USD/JPY to trade at 151.38 by the end of the quarter and 153.67 in 12 months. However, the yen faces downside risks due to the Bank of Japan's (BoJ) cautious approach to monetary policy normalisation and the economy's weaker-than-expected performance.
In its March meeting, the BoJ raised its benchmark interest rate from -0.1% to 0%, ending over eight years of negative rates. Despite this move, the central bank maintained a moderately accommodative stance, emphasising a gradual and data-dependent approach to further rate hikes. The BoJ's cautious tightening is unlikely to provide a strong boost to the yen, especially given the still-wide interest rate differentials with other major economies.
Japan's Q4 2023 GDP growth rate of 0.1% fell short of the 0.3% consensus estimate, hinting at limited JPY upside. The economy's tepid growth outlook, coupled with the BoJ's gradual policy normalisation, suggests that the yen may struggle to gain significant traction against major currencies. Additionally, the modest pace of tightening is likely to keep the USD/JPY pair elevated in the near term.
BoJ Balances Economic Recovery with Gradual Policy Normalisation
The BoJ's decision to raise interest rates to 0% marks a symbolic end to its negative rate policy. However, the central bank remains committed to supporting the ongoing economic recovery while carefully monitoring inflation. Governor Kazuo Ueda has offered a slightly bleaker assessment of the economy, stating that "weakness has been seen in some data," despite the overall moderate recovery trend.
The BoJ's policy statement indicates that the central bank will maintain a moderately accommodative stance, balancing the need to support growth while remaining vigilant against potential risks. The gradual approach to policy normalisation is expected to keep the yen relatively stable, but with limited upside potential due to the interest rate differentials with other major economies.
Upcoming Events and Geopolitical Factors to Watch
Traders should monitor several key events and geopolitical factors that could impact the yen's trajectory in the coming weeks:
US Federal Reserve's Interest Rate Decision (March 20, 2024)
Japan's Inflation Data (March 21, 2024): Higher-than-expected inflation figures may prompt the BoJ to accelerate its policy normalisation, supporting the yen.
Geopolitical Tensions: Escalating tensions in the Middle East or further drone attacks on Russia could increase safe-haven demand for the yen.
Conclusion
The Japanese yen faces downside risks in the near term, as the Bank of Japan's cautious approach to monetary policy normalisation and the economy's weaker-than-expected performance limit the currency's upside potential. While Trading Economics forecasts the USD/JPY to trade higher in the coming months, the pair's trajectory will depend on the pace of the BoJ's tightening, the interest rate differentials with other major economies, and the impact of upcoming events and geopolitical factors. Traders should remain vigilant and adapt their strategies accordingly.
Gavin Pearson
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Specialises in forex
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