Should you buy or sell the JPY in 2023?

December is a month for reflection. As activity in financial markets slows down due to the holiday season, investors look back at the trading year and prepare for the upcoming one.

2022 was dominated by rising inflation in major economies and by central banks fighting it. On top of that, geopolitical instability led to investors looking for shelter in the safety of the world’s reserve currency – the US dollar.

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The dollar took no prisoners, as it gained across the board. But it gains most against the Japanese yen. In fact, one might say that the rise was meteoric, as reflected by the USD/JPY exchange rate that climbed above 150 from below 116.

While 2022 was a one-way street for the Japanese yen, 2023 may differ. The reason is inflation, as it starts to show its teeth in Japan too.

In November, Japan’s core consumer inflation jumped to 3.7%, well above the Bank of Japan’s target. Therefore, it is no wonder that the Bank of Japan started to shift toward tightening the policy by letting the 10-year yield rise.

Bank of Japan ended the ultra-easing mode

Since its peak in 2012, the Japanese yen has fallen by 45.3% against the US dollar. The stat is nothing short of impressive, but even more impressive is that the bulk of the move came this year.

Because of the fast depreciation of the local currency, the Bank of Japan was forced to intervene. First, it sold US dollars and bought JPY. It did so twice, as the USD/JPY traded above 146 and then above 150.

On both occasions, the JPY reacted strongly.

Second, it tweaked its yield curve control policy by allowing the 10-year yield to increase. It is clear that a major shift in the Bank of Japan’s policy is underway.

Moreover, the recent decisions are even more interesting for JPY traders because the current governor is set to step down in April 2023. Kuroda is viewed as the mastermind behind the central bank’s ultra-easing mode, and his departure might bring an abrupt end to the easy money in Japan.

To sum up, the shift in the Bank of Japan’s policy at the end of 2022 is a big deal for the JPY. Should it continue, as inflation exceeds the target, then the yen is poised to rise in 2023.