How does the yen exchange rate go? The difference in monetary policy between the US and Japanese central banks is crucial

Analysts believe that whether Ueda Kazuo will continue to implement loose monetary policy after taking office will be a key factor affecting the performance of the yen exchange rate. At present, the side effects of the yield curve control policy implemented by the Bank of Japan are putting more pressure on the operation of the financial marekt.

It is foreseeable that the monetary policy difference between the Federal Reserve and the Bank of Japan will continue to be a key factor affecting the movement of the dollar against the yen in the future. Any hint or signal from the Bank of Japan to tighten monetary policy could be an important driver of the yen's strength.

A few days ago, the Bank of Japan held a monetary policy meeting in March, which was also the last monetary policy meeting chaired by current Bank of Japan Governor Haruhiko Kuroda. As expected by the market, the Bank of Japan chose to hold its hands, maintaining the base rate at a record low of -0.1% and the 10-year government bond yield target at around 0%.

There was speculation that Mr. Kuroda was likely to make adjustments to the BoJ's loose monetary policy at his last monetary policy meeting, but the BoJ proved not to have made such a choice. The result also led to a sharp jump in the dollar against the yen in the short term following the announcement of the results of the March monetary policy meeting. The BoJ expects short- and long-term interest rates to remain at current levels or lower.

The Bank of Japan, which continues to maintain an accommodative monetary policy, is expected to continue to exert downward pressure on the yen exchange rate, especially in the case that the Federal Reserve has the possibility of re-expanding the rate hike, and the pressure on the yen to continue to weaken against the dollar will increase. In fact, since the Federal Reserve began to raise interest rates sharply in a row in March last year, the yen has been in a downward trend against the dollar. The Fed's continued action of raising interest rates has led to a rapid strengthening of the dollar, a gradual increase in the yield of US government bonds, and a widening spread of US and Japanese government bond interest rates, which has led to a

At the same time, the Bank of Japan has maintained an accommodative monetary policy despite the strong interest rate hikes by the Federal Reserve, which has undoubtedly further increased the downward pressure on the yen, which fell below 150 against the dollar in October last year. It is worth noting that the yen exchange rate improved at the end of last year, mainly because at the monetary policy meeting in December last year, the Bank of Japan announced adjustments to the yield curve control (YCC) measures, allowing the upper limit of fluctuations in Japan's 10-year bond yield to rise from 0.25% to around 0.5%. This also led the market to expect that the Bank of Japan will join the ranks of central banks in advanced economies in tightening monetary policy.

However, since the beginning of this year, the Bank of Japan has not taken any further actions to tighten monetary policy, and there has been no relevant signal. So far, the market can only expect more news about the Bank of Japan's monetary policy outlook when the next Bank of Japan governor Kazuo Ueda officially takes office. Although Ueda said at the parliamentary nomination hearing that it is appropriate to continue to implement loose monetary policy, the market generally expects that after he officially takes office, the Bank of Japan's monetary policy path will be adjusted to some extent.

Combined with the trend of the yen exchange rate in the past year, it can be seen that an important factor affecting the performance of the yen exchange rate at present is the difference between the monetary policy of the Federal Reserve and the Bank of Japan. Deutsche Bank has boldly predicted in a report recently that if the Bank of Japan's monetary policy fully returns to normalization and the Federal Reserve begins to enter an easing cycle, the yen may surge to 85 yen per dollar, and is still hovering around the 134 yen mark per dollar.

Since the performance of the dollar against the yen is closely related to the monetary policy difference between the Federal Reserve and the Bank of Japan, this factor will also continue to dominate the trend of the dollar against the yen. From the current situation, the Federal Reserve may further slow down the pace of interest rate hikes at the first monetary policy meeting of the year by 25 basis points, but the subsequent release of strong employment and maintaining strong inflation data may prompt the Federal Reserve to expand the rate hike again.

The latest data shows that the number of non-farm payrolls in the United States after the February quarterly adjustment was 311,000, much higher than the expected 205,000, and the labor market is still hot. Recently, many Federal Reserve officials, including Federal Reserve Chairperson Powell, have made remarks biased towards the "hawk" faction, which has continued to heat up the market's expectations that the Federal Reserve will raise interest rates by 50 basis points at its March monetary policy meeting.fxtmFXTChief Chinese analyst Yang Aozheng analyzed that in the past month, both non-farm data, inflation rate and economic data have reflected the need for further tightening of monetary policy in the future. Last week, Powell made a big "eagle" speech in congressional testimony, and the market changed 180 degrees to the rate hike in March. Last Tuesday, Powell's testimony in the Senate was also very "hawkish", not only clearly indicating the need to accelerate the pace of interest rate hikes if necessary, but also the peak interest rate may be higher than previously expected. The yield on the US 2-year Treasury bond immediately exceeded 5%, the first time since 2007. The inversion of the yield curve for 2 and 10 years exceeded 100 basis points, a record for more than 40 years. The three major US stock indexes fell by more than 1%, and the US dollar index also rose to a two-month high.

It is worth noting that the Federal Reserve narrowed the rate of interest rate hikes at its monetary policy meeting in December last year, and at the same time continuously revealed to the market that it may further slow down the rate hikes in the future, which has become an important reason for the sharp drop in the dollar index from the 114 high in the fourth quarter of last year. If the Federal Reserve re-expands the rate hikes at its monetary policy meeting in March, or further releases the signal of continued interest rate hikes in the future, the dollar may take advantage of the momentum and strengthen again. At the same time, this will also increase the depreciation pressure of the yen against the dollar. However, the variable is that some analysts pointed out that the bankruptcy of Silicon Valley Bank in the United States may make the Federal Reserve reconsider the current rate hike policy, and the rate of interest rate hikes may continue to

From the perspective of the Bank of Japan, whether Ueda Kazuo will continue to implement loose monetary policy after taking office will become a key factor affecting the performance of the yen exchange rate. In the case of large-scale interest rate hikes by the central banks of developed economies, as the central bank that has always adhered to loose monetary policy in developed economies, the monetary policy of the Bank of Japan seems out of place. Some analysts believe that the side effects of the current YCC policy implemented by the Bank of Japan are putting more pressure on the operation of financial marekt. In response to this, Ueda Kazuo has also admitted. Therefore, the market is closely watching whether Ueda Kazuo will give more hints on the current monetary policy direction after he officially takes office, or still maintain a cautious attitude and maintain a loose monetary policy.

It is foreseeable that the monetary policy difference between the Federal Reserve and the Bank of Japan will continue to be a key factor affecting the movement of the dollar against the yen in the future. Any hint or signal from the Bank of Japan to tighten monetary policy could be an important driver of the yen's strength.