Japanese yen may continue to appreciate against USD unless BoJ takes effective measures

At present, the foreign exchange market is uncertain if the Bank of Japan is willing and capable of effectively loosening its monetary policy in a notable manner, noted Commerzbank in a research report. Unless the Japanese central bank is successful in convincing the market that it is capable, the Japanese yen is expected to keep appreciating or continue getting stronger and therefore exert pressure on prices.

But the Japanese government and the Bank of Japan are expected to continue with their inflation goal. With the Prime Minister Shinzo Abe being victorious in the upper house elections, he has not secured a political majority in order to push through coordinated monetary and fiscal measures, said Commerzbank.

Abe has already stated that he will undertake “broad, bold measures” to make the Abenomics work. The combination of monetary and fiscal policy measures are likely to be brought to a new level – for instance through helicopter money.

“We expect that as a result of these measures the yen will depreciate notably against the USD as well as EUR," added Commerzbank.

However, it is tough to anticipate the timing of such measures. The Japanese central bank has not reacted to the yen’s appreciation in the last three months. This implies that the BoJ hopes that the measures undertaken till now would reflect the desired impact. But if BoJ continues to wait longer to further ease its monetary policy, the yen is expected to appreciate, according to Commerzbank.