Yen is slowly becoming worthless

The Japanese yen is getting ‘worthless’ by the day. The USD/JPY pair rose to a high of 126.33 this week, which was the highest level since May 2002. The pair has risen by more than 67% from its lowest level in 2012, making the yen to be the worst-performing developed world currency. It has risen by almost 10% this year.

Bank of Japan policies

The USD/JPY pair has jumped sharply because of the policies of the Bank of Japan. The BOJ embraced negative interest rates in 2016 in a bid to fight deflation. It continued these policies during the Covid-19 pandemic and there are signs that they will continue for a while.

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Unfortunately, these policies have not worked to stimulate inflation. Recent data showed that the country’s headline inflation remained below 2% in February even as the cost of energy soared. Excluding oil and gas prices, inflation has barely risen to 1%. 

Japan has gone against the so-called Philip’s curve. In economics, the Philips curve states that inflation will rise when the unemployment rate falls. While Japan has one of the lowest unemployment rates, it has struggled to stimulate inflation. This is partly because of the aging population and the fact that most people in the country are highly price-sensitive.

Therefore, the divergence between the BOJ and the Fed has widened. While the Fed expects to start quantitative tightening and deliver 6 rate hikes, the BOJ has committed to ease more. In its most recent decision, the bank hinted that it will accelerate its quantitative easing policies. Today, the BOJ has a balance sheet of over $7 trillion while Japan has GDP of less than $5 trillion.

The USD/JPY has also risen because of the business landscape in Japan. In the past few years, the automobile industry that Japan dominates has changed. Today, countries like China and the US have become major players in the industry.

USD/JPY forecast

The monthly chart shows just how the Japanese yen has gotten worthless. The USD/JPY pair has risen by 67% from its 2012 lows. It has also risen in the past two consecutive months. 

Also, the pair is now at an important resistance since it struggled moving above this level in 2012. It has also formed what looks like a cup and handle pattern. Therefore, there is a likelihood that the pair will have a short pullback and continue its bullish trend.

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