Japanese Yen Continues to Strengthen – More Room for Growth?

The Japanese Yet is again of the favorite currencies among FX traders, considering several supporting factors that had gradually unwind over the past few weeks. Trading the Yen had proven to be a real challenge, considering the BoJ’s massive monetary interventions to curb it from rising. However, the market continues to see it as a safe haven and because of that, we would like to talk about some of the most important aspects looking forward.

Japanese Yen
Source: MarketWatch

Risk currencies weaken – Yen benefits

Currencies like the Euro, Pound, AUD, or NZD, generally being regarded as risk currencies, had been on the back foot during September. If we look at FX pairs like EURJPY or GBPJPY, the yen outperformance is staggering, considering the prices retraced to levels not seen since the beginning of July.

Rising COVID-19 cases and Brexit-related worries led investors to reconsider their market approach and the Yen is the clear winner. As long as flows don’t show any sign of change, the trend could continue well into October.

Mounting public debt and weak economic recovery

As the most-indebted country in the world, Japan relies heavily on the support from the central bank. The BoJ had been monetizing the debt at a record pace, and despite that, the Yen did not weaken as the government desired.

The public is domestically-owned and the country also runs a commercial surplus, which is why investors are still confident in Japan’s ability to stay afloat. The weak economic expectancies are expected to be deflationary and because of that, the currency is not subject to tumbles, as with other countries that are currently running record-high government deficits. What will happen once the COVID-19 pandemic is said and done is not priced in positively by big investors, given their low-risk tolerance.

Deflation vs. inflationary forces

As we move forward, it will be all on how the Japanese public institutions will balance both deflationary and inflationary measures. The high debt is a major deflationary force, which is why the BoJ will remain aggressive for as long as necessary. The attention is shifting towards the fiscal side and with the new PM promising to continue the work of its predecessor, low growth and low inflation is the path ahead for the country.

Still, FX pairs denominated in JPY had proven to be volatile for months, which is something traders can benefit from. A lot of important events lie ahead, which is why we expect the entire currency market to remain very active and sensitive to any major development.

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