The Bank of Japan: An FX Trader's Handbook

The Bank of Japan (BoJ) wields significant authority as a prominent central bank, orchestrating monetary policies that strive to preserve price stability and foster a robust Japanese financial ecosystem. As an arbiter of monetary affairs, the BoJ exerts direct influence over the foreign exchange (forex) market, rendering its policy meetings and consequential decisions of utmost importance for astute FX traders to monitor closely.

Discover the Bank of Japan and forex, the bank’s objectives, how monetary policy impacts FX trading, and the consequences when trading JPY.

WHAT IS THE BANL OF JAPAN?

The Bank of Japan, also known as Nichigin, serves as the Japanese central bank. It diligently implements monetary policy and oversees the issuance of currency to ensure the steadfastness of the financial system. The bank's Policy Board convenes periodic monetary policy meetings, deliberating on their distinctive approach to interest rates, and formulating innovative strategies to influence inflation.

WHO OWNS THE BANK OF JAPAN?

Intriguingly, the Japanese government exerts a controlling 55% ownership stake in the bank, granting them an absolute 100% voting interest. The remaining 45% ownership is accessible to the public, traded on the JASDAQ exchange. Notably, as of August 2019, the accomplished steward of the Bank of Japan is Haruhiko Kuroda, who has been serving diligently since March 2013, currently in his second five-year term that is scheduled to conclude in April 2023.

MAIN ECONOMIC GOALS OF JAPAN’S CENTRAL BANK

The BoJ has two core goals:

1. Keeping the financial system stable Keeping the prices stable
2. Keeping the financial system stable

The BoJ carries out its monetary policy with the goal of keeping the financial system stable, which involves currency control, monetary control and the issuing of banknotes. This also relates to the BoJ’s other main goal, as currency and monetary control is part of the plan to achieve price stability and grow the economy.

Keeping the prices stable

Keeping the prices stable is the other central goal of the BoJ. Exports are vital to Japan, so the BoJ tries to keep prices as stable as possible and will adjust interest rates with the intention of developing the national economy. The bank defines ‘price stability’ as a 2% increase year on year in the Consumer Price Index (CPI).

How does the BoJ carry out its goals?

The BoJ holds regular monetary policy meetings (MPMs), where it sets the official interest rate and other monetary policies in the hope that they will achieve price stability and financial system stability. MPMs are held eight times a year and last for two days, during which time the Policy Board (the Governor, two Deputy Governors and six other members) will discuss and implement monetary policy. As of July 2018, the base rate remains set at -0.1% in the hope of growing the economy.

THE IMPACT OF BANK OF JAPAN MONETARY POLICIES ON THE YEN

The Japanese economy has struggled with very low inflation for the last few decades, consistently failing to achieve 2% inflation. The BoJ has adopted a lax monetary policy, keeping a low interest rate in the hope of boosting the economy.

When there is little reward for saving due to a low interest rate, the idea is that people will spend more, inject money into the economy and stimulate inflation. This has led to the yen becoming increasingly weak against major currencies, including the US Dollar and the Euro, ever since Kuroda took office.

USD/JPY rose from 94.00 in March 2013 to over 125.00 in June 2015, after Kuroda announced his first batch of policy measures. And while it has fluctuated since then, the yen’s value has remained well below its level when he became governor, with USD/JPY sitting around 108.00 in July 2019.

USD/JPY chart showing the changes in value around major BoJ announcement.

During the period spanning from 2012 to 2013, the yen exhibited robustness against the US Dollar, but in June 2015, it experienced a decline, reaching a level of USD/JPY 125.00. This depreciation came as a consequence of the announcement of Kuroda's initial policy measures. Subsequently, in January 2016, Kuroda made an astonishing revelation by declaring the implementation of a negative interest rate of -0.1% on deposits held with the bank, marking the first occurrence of such a measure in history. The primary objective of this policy was to incentivize financial institutions to invest their cash elsewhere, rather than incurring losses by hoarding it.

This abrupt announcement caught the financial markets off guard, particularly since Kuroda had recently stated to the parliamentary budget committee that no policy changes were under consideration at the time. As a result of this surprise move, the yen depreciated against various currencies, including the dollar and pound, while the Japan 225 index experienced an upsurge in the hours following the announcement.

THE EFFECT OF BOJ INTEREST RATE DECISIONS ON TRADING

BoJ interest rate decisions are taken with the goal of boosting spending and investment, influencing inflation. Changes in demand for stocks and currency as interest rates change can create forex trading opportunities. Even when interest rates stay the same, the anticipation surrounding important events like monetary policy meetings can affect the forex market.

Short-term interest rates are essential in determining currency valuation, so traders will watch them closely. Here’s the general pattern:

MARKET EXPECTATIONS	ACTUAL RESULTS	RESULTING FX IMPACT
Rate Hike	Rate Hold	Depreciation of currency
Rate Cut	Rate Hold	Appreciation of currency
Rate Hold	Rate Hike	Appreciation of currency
Rate Hold	Rate Cut	Depreciation of currency

Optimizing interest rate decision trading can be bolstered by:

• Pursuing our exclusive news and analysis, and leveraging trading forecasts to stay abreast of market trends
• Engaging in our Central Bank Weekly webinar to access the most pertinent information from prominent global central banks
• Adhering to a well-defined trading plan – in times of yen volatility, traders must ensure they possess the financial capacity to absorb losses, as its value remains uncertain in either trajectory.

ESSENTIAL INSIGHTS FROM BOJ AND CURRENCY TRADING

1. The Bank of Japan holds a pivotal position in shaping the yen's worth.
2. Fluctuations in short-term interest rates significantly impact currency valuation.
3. Monetary policy gatherings at the Bank of Japan wield sway over the yen's value, given their role in critical verdicts.

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