In November, Japanese consumers faced a 3.6% hike in prices for items excluding fresh food, and inflation was accelerating faster than it had since 1982.

Governor of the Bank of Japan (BOJ) Haruhiko Kuroda’s stated view that inflation was temporary was starting to come under fire, after many months of yen sluggishness and elevated energy costs. Still, analysts expected the BOJ to hold interest rates super-low until at least April, when the Governor’s term at the helm will end.

The Japanese government’s approach to rising costs was, rather than persuading the BOJ to tighten policy, to intervene directly in the forex trading market when the yen drew near to the level of 152 to the US dollar. They spent 6.3 trillion yen on this project, and they shielded consumers from high prices by injecting $210 billion into stimulus for the economy in October.

The big news in December was that the BOJ decided to increase its cap on ten-year yields to 0.5%, which gave strategists fresh hope that a hawkish turn was on the way. The yen then surged more than it had done since 2016, gaining 4.8% on December 20th to trade at 131.93 to the USD. Union Investment Privatfonds bullishly predicted the USD/JPY currency pair would go down to 125 in the near term. “If a substantial amount of money is going to come back from abroad to Japan”, added Wells Fargo’s Erik Nelson, “that can drive that move from 125 or so down to 100”.

The landscape ahead for the yen is unclear, especially because the BOJ may end up refraining from hiking their interest rates and the US Federal Reserve may decide to keep theirs high. To steady the ships of readers trying to sail the choppy forex trading waters of early 2023, let’s take a look at some different factors that may prove key in the USD/JPY pair.

A Bullish Landscape …

Referring to the BOJ’s big policy decision in December, Societe Generale SA’s Kit Juckes pointed out, “This move increases pressure to hedge foreign asset portfolios and so to buy the yen, in thin holiday markets”. This could push the yen to greater heights, after, in the wake of the policy announcement, recording its biggest single-day gains since 1998.

By January 3rd this year, the yen had climbed a considerable 16% since living in the doldrums in October and held at 129.79 to the dollar. Analysts like Rajeev de Mello of GAMA Asset Management saw a path ahead for the yen bulls. “I would expect an end to negative rates by April. This further removes obstacles for the yen to strengthen more”, said Rajeev.

Or Bearish?

Even back in December when yen enthusiasm was gathering fast, some strategists foresaw the currency could run into obstacles going ahead. Economists’ projections for an increase in US 10-year Treasury yields put them at 3.82% in Q2 2023, which would imply a growing gap between American and Japanese yields, with the latter capped at 0.5%. This could hold the yen back. “We expect the path toward policy tightening in Japan to be slow and contained”, remarked Jane Foley of Rabobank.

When positive US employment data came out in early January, justifying continued Fed hawkishness, the yen dwindled for a fourth straight day on the fifth of the month, losing 0.9% to find itself at 134.59 to the USD. Analysts noticed that the yen had dropped below a known support level on the price charts, which might signal headwinds for its November-December rally.

The Road Ahead

Notwithstanding all the reasons to be bullish on the yen, Jane Foley warns that “We expect to see pockets of dollar buying [in 2023] …which will likely limit the amount of headway the yen can make into Spring”.

A week into January, Prime Minister Fumio Kishida was asked about the possibilities the central bank will leave behind its dovish policy. “We will consider the situation, including careful explanations and communication with markets”, was his response. He also said he would conduct discussions with the incoming Governor of the BOJ on how to shape future relations between the government and the central bank.

Data for the first week of the year showed that Japanese wages had fallen the most since 2016. The Prime Minister’s goal was, accordingly, to stimulate significant enough economic growth that wages would rise.

When doing your forex trading with the popular USD/JPY pair, stay alert to the latest official signals about any shift to dovish monetary policy. Also, keep in mind the disagreement among analysts on the question of whether the US Federal Reserve is likely to start cutting its own interest rates in the second half of the year.