19 March 2019
Bank of Japan is unlikely to consider cutting interest rates further into the negative territory. Photo: Bloomberg
Bank of Japan is unlikely to consider cutting interest rates further into the negative territory. Photo: Bloomberg

Yen uptrend likely to continue

The only bright spot in the US economy since the start of the year is the constant improvement in the employment data.

The US economy is likely to keep a moderate growth and there’s no fundamental change to the situation last December.

However, with the economies of the US and China becoming more closely interlinked, the Fed cannot ignore the headwinds from China.

I expect the Fed will not raise interest rates until the second half.

Over half of the investors expect the interest rate hike to happen in December. Expectations for another rate hike in June has further dropped from 38.1 percent to 20 percent.

Amid the rate hike uncertainties and the continued decline in the price of oil, the market is once again dominated by risk aversion.

The yen strengthened to 109.22 against the greenback on Thursday, marking a 17-month low for the US dollar.

The Japanese government has been pinning its hopes on a weak yen to save the economy. But after adopting measures to curb the currency’s rise in November 2011, it has stayed out of the market.

As most of the major central banks are avoiding a currency war, it would be inappropriate for Japanese central bank to intervene.

Moreover, past experience shows that a direct intervention in the exchange rate can do little to stimulate the economy.

The Japanese central bank is set to review its interest rate policy later this month. A source cited by Reuters said it may launch more easing policies, but will not consider cutting interest rates further into the negative territory.

It is said that many Japanese exporters have complained about the yen’s rise after a negative interest rate was adopted.

So the central bank is likely to buy more assets, like exchange-traded funds or bank bonds, or adopt other unconventional ways to stimulate the economy.

In short, the yen’s uptrend may continue.

If China keeps a stable growth, or the oil price stabilizes, or the Fed raises the interest rate in the middle of the year, the yen may weaken to above 115 against the dollar in the third quarter.

This article appeared in the Hong Kong Economic Journal on April 8.

Translation by Myssie You

[Chinese version 中文版]

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Senior investment strategist and vice president, treasury & markets division, DBS Bank (Hong Kong)

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