Growing risk aversion amongst investors due to the extremely challenging global environment has served to push the yen drastically higher against peer currencies, even after an aggressive cut to interest rates by the Bank of Japan that initially weakened the currency. The yen continues to climb versus the dollar and others, as its safe-haven qualities attract investors who deem the risks of leaving capital in equity markets too high, and prefer assets like gold, which hit price levels the highest since June of 2015 amid this market turbulence. If historical results are anything to go by, a rapid implementation of stimulus measures would quickly cause a currency to devalue, but the yen bucked trends almost immediately after erasing all of the moves seen in the few days post-decision. Volatility in equity markets the world over creates an evaporation of demand in risk assets, unwinding the yen carry-trade with the Dollar, and pulling the USD/JPY pair downward since the month began.
In the midst of a regional trade problem in the Asian territories and among pressures from many other sources, stagnant wage growth and deflation are two of the biggest worries for the country. Though cutting rates is fundamentally designed to increase competitiveness and consumption, the record revenues enjoyed by Japanese companies in 2015 was not shared with employees, with low earnings and falling prices de-incentivizing consumers to buy. This doesn’t even take into account the inflation target, which will prove harder to attain that previously thought. Perhaps the best path to take for the Central Bank was to take rates negative, especially after the bond market was largely cornered by quantitative easing, but current trends in equities and the reversal from the intended outcome of last week’s decision makes the decision itself almost worthless. Whether or not the fundamental results from the latest moves by policymakers work, the yen is likely to continue its climb as the global economy weakens further.