Bank of Japan May Cause Unintentional Yen Strengthening towards 110 Levels by Being Forced to Reduce Securities Purchases

The selling of USD/JPY that began after last week's FOMC rate hike has continued again on Monday, August 1, in Asia trade started the new week and month. It's marking a new post-FOMC low close to the tune of 132.00, its lowest now since the middle of June.

The USD/JPY currency pair initially attempted to rally last week, but found strong resistance in the area above the ¥135 level. Now that the currency have broken down below there, the market has reached the ¥133.50 level, thereafter rolling back to this morning’s ¥132.30. Hence, the market is reaching lower levels and a support level down to the lower range of ¥131.50, where currently we see all the trading events happening.

The Bank of Japan continues to buy government bonds in an unlimited amount. This is essentially Bank of Japan’s quantitative easing, so it’s worth noting that the longer-term trend should hold. Let’s remember also, that Japan’s consumer inflation remained above the central bank’s 2% target for a 3rd straight month in June, and July is most likely no exception (relevant data haven’t been released yet), which is utterly uncharacteristic and surprising for Japan.

The rise in consumer prices keeps challenging the Bank of Japan’s view that recent price hikes in the world’s third-largest economy, unlike in the U.S. and EU, will remain muted, even as households worry about higher living costs. However, since Japan imports a lot of materials and components it doesn’t produce, Japan’s economy may have already been exposed to global inflationary processes. Once it becomes clear, the market would most likely be thrilled to contemplate Japanese yen regaining strength as BoJ may find itself in a position when it is obliged to significantly reduce the amount or even stop buying up securities – for the first time in two decades – just the way the U.S. Fed recently announced.