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Bank of Japan (BOJ) open to act on excessive Japanese yen decline 

May 29, 2024

Key Points: 

  • Bank of Japan (BOJ) board member Seiji Adachi signals possible policy action if the Japanese yen falls excessively. 
  • Underlying inflation continues to trend toward 2%. 
  • BOJ to adjust monetary support based on economic, price and financial developments. 

On Wednesday, Bank of Japan (BOJ) board member Seiji Adachi indicated that the central bank may take monetary policy action if excessive depreciation of the Japanese yen (JPY) persists and significantly impacts inflation expectations. Adachi emphasized the importance of adjusting the degree of monetary support in response to ongoing economic, price and financial developments if underlying inflation continues to trend toward the target of 2%. 

This suggests a vigilant stance by the BOJ in monitoring the movements of JPY. The depreciation of the JPY has been a concern due to its potential to drive up import costs, thus influencing inflation. If JPY falls too sharply, it could lead to higher inflation than desired, prompting the BOJ to intervene. 

Chart depicting the USD/JPY exchange rate with key indicators and trends on VT Markets, a forex CFDs brokerage. The chart shows USD/JPY trading at 157.102, reflecting recent movements influenced by Bank of Japan (BOJ) statements. BOJ board member Seiji Adachi indicated potential monetary policy action if excessive depreciation of the Japanese yen persists, impacting inflation expectations.

Picture: USD appreciating against the JPY, as observed on the VT Markets app

Such remarks by Adachi have come as the BOJ faces the challenge of balancing support for the economy while managing inflation expectations. The central bank has maintained ultra-loose monetary policy for years to combat deflationary pressures, but a sharp depreciation of the JPY could force a recalibration of this approach. 

Related article: Sakura viewing in Japan is now cheaper with weakening JPY 

Challenges and opportunities lie ahead for the JPY pairs 

For traders eyeing currency pairs involving the JPY, such a market direction presents both challenges and opportunities. If the JPY continues to fall excessively, the BOJ may implement measures to stabilize the currency. This could include increased foreign exchange interventions or adjustments to monetary policy. However, actions of the BOJ will depend on the trajectory of underlying inflation. If inflation trends consistently toward the 2% target, the BOJ may gradually reduce monetary support.  

A solid understanding of the currency correlation linking global financial markets and the specific factors driving the JPY. Traders are encouraged to include fundamental analysis in adapting their strategies to align with the shifting market conditions as they navigate the complexities of currency trading effectively. 

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