The Japanese yen strengthened slightly against the USD after the Bank of Japan (BOJ) released its interest rates decision. The stocks too rose sharply in response to the decision. As expected, the bank left rates unchanged at minus 0.1%. It also maintained its goal of keeping the ten-year government bonds (JGBs) around zero. In the statement, the bank blamed the current situation to the trade crisis that is affecting the world. This has led to lower exports and imports. Traders don’t expect the country to raise rates any time soon.
The BOJ lowered rates in response to the 2008/9 global financial crisis. By lowering rates, the bank wanted to make it easier for companies and individuals to borrow money with the goal of stimulating growth. As the people increased their borrowing, the bank expected that this would stimulate the inflation in the country.
However, Japan is a unique country because the economy appears to have defied the Philips Curve. The curve states that inflation rate will rise when the unemployment rate decreases. Indeed, the country’s unemployment rate is among the world’s lowest. The rate stands at below to 2.5%.
The challenge is that the labor sector in Japan is slightly different. In the Western countries like United States and United Kingdom, when there are more vacancies, people are usually flexible to move. In Japan, workers are usually more attached to the company, which makes them feel the need to see it grow. In other words, they don’t move a lot. In addition, most of the people usually prefer saving to spending. Another challenge is that Japanese are getting older and their population is declining. All these challenges make it almost impossible for the BOJ to raise interest rates. They also expose it to challenges in case of a major global crisis. This is because it will not have a remedy for addressing the crisis. In case of such crisis, the Fed could respond by initiating the Quantitative Easing program and by lowering interest rates.
The USD/JPY pair declined today after the BOJ made its interest rates decision. The pair reached an intraday low of 111.50 and then pared some of those losses. This price is along the 21-day and 42-day moving averages. It is also along the 61.8% Fibonacci Retracement level. The pair could resume the upward trend to test the previous high of 11.90.