Since the beginning of the year, the Japanese Yen has been strengthening notably after the period of weakness at the end of last year.
Last year USDJPY strength came on the back of the US Dollar rally as the Fed’s kicked off its policy tightening. However, this has been a negative factor for Japan. The Bank of Japan has been trying to keep the pressure on the Yen for a long time to fight deflation; it seems like the BoJ policy is not that effective.
At the beginning of the year the Yen was trading around 118.0, while on Friday, the pair closed the week around 111.0.
Inflation, growth and many economic activities are slowing down, not only in Japan but globally, which in return should keep the BoJ from thinking to exit the current easy policy anytime soon.
Declining Inflation
After suffering from Deflation in 2016, Japan’s inflation picked up in the end of 2016. In November of last year, Japan inflation posted the biggest monthly increase in more than two years.
However, it has been slowing down since then. The latest outcomes show only an increase of 0.2%, which is the weakest reading since October of last year. At the same time, JPY has been rising during the same period. Is this only due to the Japanese Yen? Maybe.
Unstable Growth
Despite the fact that Japan managed to post a positive GDP readings for the past five quarters, and the annual GDP has been rising for the past eight quarters, the economic activities have been unstable due to the continuous measures by the BoJ.
Negative rates are helping growth in some sectors but not in the overall economy, especially knowing that the Debt to GDP ratio is now over 250% and the government budget deficit is over 4.5%.
However, the Jobless Rate has been declining to a new record, below 3%, which is one of the lowest jobless rates in the world.
Is this enough for the BoJ to think about Exit policy? Not really, as wages are still weak and not even trending. What matters to the BoJ now are inflation and wages.
