There is a growing belief among some economists that quantitative tightening (QT) could potentially lead to a stronger and more sustainable Japanese Yen. The Bank of Japan (BoJ) is set to announce cuts to its Japanese Government Bond (JGB) purchases in July, a move that could have significant implications for the currency market.
According to Natixis Asia Pacific Chief Economist Alicia Garcia Herrero, the BoJ’s decision to start quantitative tightening could potentially provide more support for the Yen compared to intervention measures. Aggressively cutting JGB purchases would help to narrow the interest rate differentials between the Yen and the US dollar, ultimately strengthening the Japanese currency.
It is anticipated that aggressive cuts to JGB purchases could potentially drive the USD/JPY exchange rate below 150. Furthermore, if the BoJ continues to support multiple rate hikes and maintains aggressive cuts to JGB purchases, we could see the USD/JPY trend towards 140 by the end of Q4 in 2024.
In the coming days, several key economic indicators from Japan will require close monitoring. The labor market data, to be released on Tuesday, will be crucial in assessing the country’s economic health. Tighter labor market conditions could lead to wage growth, thereby increasing disposable income. This, in turn, might fuel consumer spending and demand-driven inflation.
Economists are forecasting that Japan’s unemployment rate will remain steady at 2.6% for the month of June. Any unexpected rise in the unemployment rate could potentially influence the BoJ’s decision on interest rates. Additionally, retail sales numbers, set to be released on Wednesday, could play a significant role in shaping the BoJ’s future strategies. Economists are expecting a 0.4% increase in retail sales for June following a 1.7% rise in May.
The upcoming Dallas Fed Manufacturing Index, scheduled for release on Monday, will also be closely watched. Economists are predicting an increase in the index from -15.1 in June to -12.0 in July. Higher than expected figures could support the notion of a soft landing for the US economy and maintain the USD/JPY at its current levels. However, recent US inflation data suggest that these numbers are unlikely to have a significant impact on the Federal Reserve’s interest rate trajectory, as prices for goods declined in June.
The potential impact of quantitative tightening on the Yen cannot be overstated. The decisions made by the BoJ in the coming weeks could have far-reaching implications for both the currency market and the overall Japanese economy.