Yen only likely to appreciate long-term if there is early move away from current monetary policy

We were able to experience the new governor of the Bank of Japan (BoJ), Kazuo Ueda, in his new role for the first time yesterday. Everything remains unchanged. That was JPY-negative initially. Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank, analyzes the management of JPY risks.

Ueda leaves everything unchanged

“What he had to say was in no way positive for JPY, as he underlined that he would continue his predecessor’s ultra-expansionary monetary policy. The indicator of this is the yield curve control (YCC) which would probably be the first element to change in a possible exit scenario. However, Ueda rejected this kind of change. In other words: everything remains unchanged.”

“Tthe Yen is only likely to appreciate long-term if there is this early move away from current monetary policy. Otherwise, it will mean: If the BoJ waits for too long, the Yen might easily suffer despite increased (real) yields. Or inflation eases back below the BoJ’s target level (2%). At that point we would be back to square one, which means a move away from the ultra-expansionary monetary policy would be unlikely. Short, medium and long-term.”

“Anyone who has already read the IMF’s latest "World Economic Outlook" and who follows its view might come to the conclusion that after the current inflation shock has worn off real yields in the rest of the world will be back at low levels. Followers of that view might not be excessively JPY-pessimistic, as the real yield disadvantage of the Yen would be reasonably moderate in that case.”

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