EUR/JPY appreciates on Yen weakness, nearing March highs at 184.75
- EUR/JPY extends gains for the second consecutive day and reaches 154.50.
- Euro bulls are focusing on March highs at the 184.67-184.75 area.
- Concerns about the consequences of high Oil prices to Japan's economy are hammering the Yen.
The Euro (EUR) is crawling up against a weak Japanese Yen (JPY) on Tuesday. The pair extends gains for the second consecutive day, trading at 184.47 at the time of writing, with bulls focusing on March’s peaks in the 184.65-184.75 area.
The Yen is struggling on Tuesday, weighed down by growing concerns about the economic consequences of high Oil prices, if Iran does not open the Strait of Hormuz soon.
Concerns about an inflation spiral in Japan
Investors are wary that the price pressures stemming from high energy costs in a major Oil importer such as Japan, coupled with Prime Minister Sanae Takaichi’s stimulus programs, might trigger an inflation spiral, forcing the Bank of Japan (BoJ) to hike rates while the Government increases an already ballooning debt to soften the inflationary impact on households.
Underlying inflation in Japan has reached the BoJ’s 2% target and is expected to keep accelerating if the war in Iran extends. Futures markets are pricing a 50% chance of a BoJ rate hike in April and almost fully pricing a hike before the summer. A former BoJ Monetary Policy Committee member, Seiji Adachi, endorsed this view on Tuesday, affirming that the bank is under pressure to move quickly if it doesn’t want to fall behind the curve.
The European Central Bank (ECB) is also expected to hike interest rates in the near term, probably also in April, although the newest member of the ECB’s Governing Council, Dimitar Radev, refused to commit on that date in a recent interview with Reuters. Radev acknowledged that inflation expectations are at risk of rising faster than in the past but said that the bank will need further data to confirm April’s decision.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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