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When we look at activity in the currency markets over the last few years, it is clear that there is a great deal of bullish momentum with respect to currencies that are being traded against the Japanese yen.  In most cases, the Bank of Japan (BOJ) is one of the more active central banks so it will be critical to assess these areas in order to know which trends are likely to dominate the forex markets over the next few months.

Assessing Stances at the BOJ

In 2013, the Bank of Japan (BOJ) announced its plan to establish a 2% inflation target. Following this announcement, the country’s GDP has been raised by a mere 0.6% growth average. Disappointing numbers have led the BOJ to believe that it has the necessary evidence to continue with its inflation target.

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Due to the decline in Japan’s economy, the central bank will likely continue to implement its qualitative and quantitative easing policy until its 2% inflation has been reached — but there is essentially no indication that this will be happening any time soon. Currently, the interest rate is sitting at 0.0%, up from the previous -0.1% that the BOJ introduced in January. The negative rates were expected to weaken the yen but instead the yen has strengthened as a result of exporters buying the currency and returning it to Japan.

Government Stimulus

Stimulus from the government has been expected multiple times throughout the past three years, but the bank has not changed its course of action. Analysts now expect the BOJ to respond with additional ease in economic policy, seeing as inflation is not progressing as quickly as previously hoped. The BOJ is also expected to increase its stock market assets by more than five trillion yen. This comes at a time when large Japanese corporations have high liquidity and are not currently investing in the economy.

Limited Options?

Companies have understood January’s negative rates to mean that the BOJ is running out of options. Introducing the negative interest rates was the central bank’s attempt to strengthen the economy. Conversely, the rates have contributed to its decline thanks to current lack of confidence that Japanese corporations have in the country’s economic state.

In January, the BOJ had forecasted a 1.5% growth in GDP; however, due to little change in Japan’s economy, the bank has reduced its forecast to 1.2% growth. Currently, the central bank remains strong in its policy in spite of little improvement.  This is something that could negatively impact the JPY over the next several months.