Insights

Japan’s economic evolution and how to trade JPY in 2024

By Paul Reid

26 June 2024

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The Japanese Yen and the Bank of Japan (BOJ) have been dominating economic news for several months, and though analysts west of the Pacific say Japan is in trouble, Asian reporters say Japan is one of only a few countries worldwide that are not spinning out of control. Let’s dig deep into the Japanese economy, see what all the fuss is about, and find out if JPY will be the haven asset of 2024.

Japan's Chief Cabinet Secretary, Yoshimasa Hayashi, recently stated that he would respond appropriately to excessive currency volatility. This comes after JPY hit an all-time low, touching 160 (against USD), prompting the BOJ to spend billions of dollars on a Yen-buying intervention. This epic JPY weakness continues to baffle investors and traders. Despite all the data, there’s nothing solid that can explain JPY’s massive decline against USD… or is there?

US and EU analysts point to a fall in Japanese production and a diminishing workforce. And yet thousands of young Japanese graduates are forced to return to their villages to assume undesirable agricultural roles in the absence of job vacancies. Such contrasting facts suggest there is more to the story.

As for production declines, numbers are indeed falling, and yet, Japan’s exports have surged recently, growing 13.5%, according to a May 2024 report. The idea that production volumes carry more weight than export figures is flawed and a sign that disinformation is circulating in Western mainstream financial media. Caution is advised.

Outside of the questionable production theory, there are no solid explanations for JPY’s weaknesses… apart from the big one that so many independent analysts and economists are trying and failing to expose.

Controversies in Japan's economy

The BOJ has been walking a tightrope between stimulating economic growth and managing the side effects of its unconventional monetary policies. One such policy is the negative interest rate policy, which aims to encourage borrowing and spending. However, it has unintended consequences, such as squeezing bank profits and discouraging lending.

The BOJ also implements Yield Curve Control (YCC), targeting a 0% yield on 10-year government bonds. This strategy aims to keep long-term interest rates low and stabilize the yield curve. However, critics argue it distorts market signals and hampers efficient capital allocation.

Unlike the Fed, the BOJ, as of June 2024, has not raised its interest rates for over a year. The US continues to print dollars and sell overseas, offering attractive interest rates from a range of 5.25% to 5.50%. This economic tactic was pioneered by the US, but many countries use it. Increasing money supplies and then selling it overseas falsely boosts a currency’s value. As the currency is elevated, the national debt rises in weighted proportion.

Since Japan is not playing those inflationary survival tactics, JPY is getting ignored by the big investors and suffering on the price charts. So why doesn’t Japan play the same economic game as the US and the EU?

Maybe they are about to do exactly that. Minutes from the Bank of Japan's last meeting revealed discussions about a near-term interest rate hike. In addition, the Nikkei reported that the Bank of Japan might allow 10-year Japanese government bond yields to rise above 1% in an upcoming policy decision. If the BOJ raises interest rates, traders and investors will surely react to this sudden change in policy, and market sentiment may propel JPY into the global spotlight. Make sure your trading account is active before that happens. The markets will move fast.

Where are Japan and JPY heading in the long term?

Japan's public debt-to-GDP ratio is a genuine concern for the BOJ. To give perspective, debt-to-GDP signifies a nation’s ability to repay debts.

The UK has clawed itself back, with debt standing at 97.9% of GDP. In contrast, The US debt is higher than the GDP, showing 122.4%. And then there’s Japan, raging with a 217.3% debt over GDP ratio. A very troubling situation, and likely because Japan has maintained negative interest rates for so long.

Raising BOC interest rates in concert with negative USD reports could kickstart a reversal, and the likelihood that the BOC will do it is growing every day.

JPY price analysis

At the time of writing, USDJPY remained near the 160.00 level, which triggered Japan's intervention. As long as it stays above 159.30, further gains are possible, potentially reaching resistance at 160.25.

Soft Japanese CPI (Consumer Price Index) may have further weakened the JPY, falling to 2.5% YoY in April from 2.7%. For now, the BOJ resists tightening policies, even as other central banks raise rates to combat rising prices. Indicators currently support a continuation of the trend until the next significant fundamental event occurs.

Conclusion

Yen is weak, and USD is riding high, so a USDJPY sell order may seem tempting right now. USD is indeed overpriced and lacks the financial foundations to continue. Eventually, the greenback should correct, and when that happens, all eyes will be on USDJPY. Especially if it coincides with a BOJ interest rate hike.

But as the US moves towards election month, all economic measures and reports should be treated with caution. Propaganda and selective reporting are widespread in an attempt to influence US voting and keep the currenct party in the White House. This facade of economic stability will crumble, and when that happens, JPY might once again become the haven asset that big investors will turn to. Buy low, sell high, trade smart.


This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.


Author:

Paul Reid
Paul Reid

Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.