The Japanese yen has been weakening against the U.S. dollar this week ahead of a key policy announcement from the Bank of Japan. Investors and analysts alike believe the central bank will announce further stimulus measures and leave the door open to further loosening of monetary policy later this year.
Japan’s central bank pushed borrowing rates down into negative territory in January, joining its counterparts in the European Union, Switzerland and Sweden in an aggressive bid to discourage banks from sitting on money.
Currently the Bank of Japan and the U.S. Federal Reserve are moving in opposite directions. The U.S. is cautiously working to push up borrowing rates, but a global slowdown and tepid U.S. inflation are hampering these efforts. Meanwhile, the U.S. dollar and the Japanese yen have been strengthening amid uncertainties that have pushed investors into these “safe haven” currencies. Japan has been trying to drive the yen down in order to make its exports cheaper and strengthen corporate profits earned abroad.
The yen has weakened 3 percent against the dollar since closing at its lowest level since late October earlier this month. The short-lived surge came as companies repatriated overseas profits at the start of the country’s fiscal year.
But last week the Bank of Japan said it was considering further cuts to the rate it charges banks for borrowing. Since then, currency traders began betting more firmly on further stimulus measures, which most believe will be announced at the end of the Bank of Japan’s two-day policy meeting that starts Wednesday. The yen closed at 111.3 against the dollar Tuesday, down in value from a close of 107.9 on April 11. Analysts at UBS expect the yen to end the year at 122 unless the Bank of Japan tightens economic stimulus this year.
“We expect the BoJ to loosen policy further on Thursday – probably via an expansion in the rate of its asset purchases as well as a cut in the interest rate on excess reserves,” Alex Holmes, assistant economist at U.K.-based Capital Economics, said in a note Tuesday addressing the effects of U.S. and Japanese monetary policy decisions this week. “We also think the BoJ will maintain a bias towards easing and loosen course of the coming year.”
Fed Chair Janet Yellen is widely expected to keep current policy steady, hesitant to continue the course started in December toward normalizing interest rates. Concern over global economic growth and persistently lower-than-ideal U.S. inflation is keeping the Fed cautious, but the possibly of another rate hike in June is still in play. While the Fed remains cautious on tightening policy, the Bank of Japan holds a bias towards easing.
That means the BoJ is expected expand asset purchases from banks, which introduces more currency into the economy, and dive further into negative interest-rate territory, charging banks for holding deposits to encourage them to lend. The bank could also begin implementing negative rates on lending money to banks, too, according to UBS in a note Tuesday.
Between the U.S. Fed’s cautious rate policy and the Bank of Japan’s aggressive stimulus, the yen is expected to weaken further this year, analysts say, a move that would benefit Japanese companies because it makes their exports more affordable in foreign currencies, including the dollar, whose strength has battered U.S. corporate earnings for much of the past year.