Control of the Bulls is Getting

In short, any strength for the Japanese Yen should be considered temporary as the odds favor further weakness. 

• Since the start of trading this week and the price of the currency pair the US dollar against the Japanese yen is on the path of rebounding upwards with gains reaching the resistance level of 137.70 which is stable around it at the time of writing the analysis.
• Investors have largely abandoned the Japanese yen since the new governor of the Japanese central bank confirmed that he is determined to continue stimulating the Japanese economy by following the same policy as his predecessor with the lowest interest rates among the world’s central banks.
• In contrast, the statements of several officials of the American Federal Reserve Bank confirmed this week that the bank is determined to continue raising the American interest rate until the American inflation reaches the bank’s goal.

I’ve written extensively about the Japanese yen (JPY) this year and why it’s in a bearish trend. Here is the last article, after the Bank of Japan announced its latest decision on monetary policy. Many traders believe that it is inevitable that the Bank of Japan will eventually change the course of its monetary policy. After keeping it very loose, it will be time for the Bank of Japan to follow other central banks in tightening monetary policy.

After all, inflation is rising in Japan too. For example, a recent poll on the opinions and behavior of the general public showed that 94.5% of respondents believe that price levels have risen. For example, food prices were higher in March 2023 compared to September and March 2022. The same applies to eating out or daily necessities.

But despite signs of rising domestic price levels, the Japanese yen’s downward trend is unlikely to change. This is especially true for the USD/JPY for at least two reasons:

• 65+ year segment to increase
• Monetary policy difference

More Japanese are living more than 65 years old despite the declining population in the future. One of the reasons why the Japanese yen is in a long-term downward trend is the demographic factors. Japan’s population is expected to drop to 87 million by 2070, and most strikingly, people aged 65 and over will make up 38.7% of the population. The problem with this statistic lies in the fact that the elderly do not spend money as the younger ones do. The older we get, the more careful we are about finances – it’s a fact.

Hence, for inflation to rise, spending must increase. However, spending is unlikely to rise as much as the Bank of Japan would like, so tightening policy will be difficult.

In contrast, the US Federal Reserve Bank and the Bank of Japan are following different paths. The latter still eases monetary policy by operating a tight system to control the yield curve. Now suppose the Fed decides to cut interest rates this year. It will only do so if inflation falls to its 2% target. But if that happens, it means that Japan’s inflation will also decrease because the US is the world’s leading inflation/deflationist as the world’s largest economy. Thus, the Bank of Japan will not have room to raise interest rates, but will likely need to ease more.

In short, any strength for the Japanese Yen should be considered temporary as the odds favor further weakness. The USD/JPY in particular looks bullish in the medium and long term. The chance of the bulls moving the currency pair toward the psychological resistance level of 140.00 is especially strong if the currency pair moves toward the resistance levels of 138.25 and 139.00 respectively. On the other hand, according to the performance on the daily chart below, the current uptrend will be negatively affected by the currency pair moving below the 135.50 support level.

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