Later today the Bank of Japan is going to issue its usual monthly Monetary Policy Statement, Outlook Report and Policy Rate. The Yen has been one of the most volatile currencies during the past few years, and there is good reason for that – it is because the Bank of Japan had a challenging task in trying to manage the Japanese economy with its monetary policy. Initially, it was all about letting the Yen depreciate, and inflating the economy back to health. This was followed by signals that the fall had gone too far. However, lately we seem to be arriving at a place where the Japanese economy is more or less where the Bank of Japan wants it. Growth is picking up (helped by Chinese overperformance) and inflation is slowly starting to approach the Bank’s target. This suggests that a surprise from the Bank of Japan later is very unlikely (leaving aside the fact that surprises are always unlikely). One complicating factor is that the Yen is a safe-haven currency, so the Bank’s position is complicated by the fact that political tension can cause large capital inflows.
Does this mean that the Yen’s volatility of recent years is likely to decrease? Well, if we take the 30-day average true range as an example, it just made a new 1 year low a few days ago. It has been decreasing since the end of January, although the same has occurred throughout the Forex market overall, and the USD/JPY pair is still one of the most volatile of all Forex currency pairs. This suggests that the Japanese Yen still has a lot of action in it, and in fact it is nice to trade as it seems to move quite strongly after it “turns”. However, we are seeing more life come into European currencies such as the British Pound, so if there are no economic surprises or serious geopolitical tensions, it would not be surprising if the Yen became more stable.