Should you buy or sell the JPY amid the appointment of a new BOJ Governor?

The currency market was not particularly volatile in 2023. For example, if one looks at the EUR/USD exchange rate, it is just a couple of hundred pips higher than the start of the year levels. The same is true for other pairs, including the Japanese yen ones, known for their higher volatility.

One of the reasons for that is the transition at the helm of the Bank of Japan (BOJ). A new Governor, Kazuo Ueda, is in charge of the monetary policy.

Ahead of its appointment, there was speculation that the BOJ would end the easy monetary policy. After all, it diverges from all major central banks by keeping its yield curve control program, whereas other central banks tighten their policies.

But instead of signaling what speculators believed, Ueda did the opposite. He reiterated the 25-year challenge the BOJ faced to achieve price stability.

Also, he said that negative rates are here to stay. Moreover, he praised his predecessor’s policies. Haruhiko Kuroda led the BOJ for years and took the monetary policy where no other central bank has gone before.

Chronic excess savings puts pressure on the yen

The yen took a beating recently as the new head of the central bank wants to maintain negative rates and encourage a weaker currency. Thirty years of similar policies seem not to alter the BOJ’s determination to achieve price stability.

One could not stop wondering why the BOJ goes to such extremes in its monetary policy. The answer is chronic excess savings.

Private savings in Japan are exceptionally high at about 29% of GDP from 2010 to 2019. Hence, reaching inflation levels in line with price stability has been challenging as the money was simply not spent.

Unless and until that changes, excess savings will put pressure on the Japanese yen because the BOJ will act to counter the adverse effects of excess savings. This means a weaker currency, so the yen is likely to remain under pressure despite the change of Governor.