USD/JPY price is trying to erase month-to-date gains after falling as much as 7.1% in November. The correction in price action is understandable after the pair rose over 32% since early March.
Hopes that the Federal Reserve may slow down the pace of rate hikes fueled a pullback in bond yields, allowing the dollar to also take a break. Moreover, the Japanese yen was boosted by reports that the Bank of Japan (BoJ) may conduct a policy review next year.
Could BoJ Pivot from its Ultra-loose Policy?
Japan’s central bank is reportedly considering carrying out a policy review in 2023 after it analyzes wage growth and any potential economic slowdown, according to Bloomberg News. However, the review is unlikely to happen before the end of Governor Haruhiko Kuroda’s decade-long term in April amid uncertainty around some factors, the report added.
One of those factors is the preliminary results of the annual spring wage discussions, which are expected to take place in March 2023. Historically, the wage results were published after the policy meeting. Kuroda’s final policy meeting is scheduled for March 9-10.
Previous reviews by BoJ have led to policy changes, such as the launch of the yield curve control program. If the review happens next year, one possibility is a pivot from Kuroda’s current ultra-easy policy approach. Alternatively, the central bank could also reaffirm the existing framework after making an assessment.
The Bloomberg report comes a week after Kuroda said it is too early to make an assessment, following comments by policy board member Naoki Tamura, who said the review should be conducted when the time is right. The BoJ officials said there is no significant divergence between the two stances, with Tamura also saying there is no urgency to make a review.
This suggests that the officials prefer taking their time before carrying out a policy review, mainly because of extremely uncertain factors such as spring wage discussions and the extent of the U.S. economic slowdown in 2023, which could have major implications on both the Japanese and global economies.
The report also states there are no guarantees that the review will even happen. If it does, it is difficult to say whether the BoJ will focus on upcoming steps or pay more attention to what went wrong. Another possibility is that the BoJ could simply make policy changes without publicly disclosing the review.
Some bank representatives think the right time for making the review is sometime after the 10th anniversary of Kuroda’s easing plan, while others argue there is no rush to assess the policy given that the bank already had a review in March 2021.
Some analysts hinted recently that a pivot from BoJ’s ultra-loose policy approach could weigh on the dollar. The pivot would mean the end of yield-curve control in Japan, which is bullish for the yen.
On the other hand, the dollar’s performance against the euro is unlikely to change significantly next year as the greenback’s notable interest rate advantage is expected to be overshadowed by the European Central Bank’s (ECB) progress toward policy normalization.
As BoJ Considers, Fed Takes More Actions
Earlier this week, the latest consumer price index (CPI) print showed that U.S. inflation cooled down to 7.1% in November, compared to consensus estimates of 7.3%. Month-over-month, CPI rose just 0.1% from October, while analysts were estimating a 0.3% increase. The core CPI, which disregards volatile food and energy costs, rose 0.2% on a monthly and 6% on an annual basis, compared to respective consensus expectations of 0.3% and 6.1%.
“Cooling inflation will boost the markets and take pressure off the Fed for raising rates, but most importantly this spells real relief starting for Americans whose finances have been punished by higher prices,” said Robert Frick, corporate economist at the Navy Federal Credit Union.
The latest inflation decline comes after a drop in energy prices, which are seen as one of the key inflation drivers. The energy index fell 1.6% on a monthly basis amid a 2% drop in gasoline costs, however, it was still 13.1% higher compared to November 2021.
Meanwhile, food prices increased 0.5% for the month and 10.6% on an annual basis. Shelter costs, which account for around one-third of CPI weighting, also rose by 0.6% from the month before and 7.1% from the year-ago period.
The CPI print was followed by a 50 basis points (bps) interest rate hike on Wednesday, marking the first 50 bps increase after four consecutive 75 bps hikes. While the central bank slowed the pace of hikes this month, the latest increase raised the Fed’s benchmark rate to the highest level in 15 years, suggesting that the battle against inflation is not over yet.
As a result, the dollar has returned to trade higher against the yen today. The USD/JPY price is now approaching the key near-term resistance above the 137 handle, which consists of a 2-month descending trend line and the horizontal resistance (previous support). The pair is supported by the 200 daily moving average, which trades at 135.44.
If the zone around 137 gives in, the USD/JPY could be heading toward the 100 daily moving average, which is currently trading just above 141.
Conclusion
USD/JPY price could be heading higher in the near term after a period of consolidation, which resulted in a 12% correction from the recent peak. As one of the major currency pairs in the forex market, the activity of the USD/JPY is poised to impact the larger forex market. Yet the impact doesn’t end there; the continued tightening of the Fed’s monetary policy is likely to underpin more dollar strength in the coming weeks and months, which is likely to negatively impact U.S. equities.