More ‘dovish’ Bank of Japan leads to a sharp JPY depreciation – The Peninsula

More ‘dovish’ Bank of Japan leads to a sharp JPY depreciation – The Peninsula

QNB ECONOMIC COMMENTARY

Doha: Foreign exchange markets (FX) of major currency pairs tend to be steady, slow-moving and extremely liquid. This is why it is relatively rare, in the absence of massive shocks or market dislocations, to see big movements in these currencies. However, over the last few quarters, the Japanese Yen (JPY) depreciated in record speed against the USD. The USD:JPY movement accelerated further in recent weeks, with the Japanese currency declining to levels that were not seen for years.

The cause of the strong depreciation of the JPY is mainly to be found between a clear difference in the policy stance of the Bank of Japan (BoJ) and other major central banks. The US Federal Reserve (Fed) and the European Central Bank (ECB) are advancing on a “hawkish” policy shift to tame inflation. The BoJ’s approach is set to maintain its mix of ultra-easy policies for longer, given that inflation is not a topic of concern for Japan. With this, BoJ will continue to pursue negative interest rates, broad-based asset purchases and yield curve control measures that cap long-term rates at low levels.

Such policy divergence is leading to significant capital outflows from Japan to other advanced economies, particularly the US,