The Bank of Japan (BoJ) is a major central bank that sets monetary policy to maintain price stability and a strong Japanese financial system. As a central bank, the BoJ has a direct impact on the forex market, so its policy meetings and the decisions they make are important to FX traders.
Learn about the Bank of Japan and forex, what the bank does, how monetary policy affects forex trading, and the impact when trading the JPY.
Learn about the Bank of Japan
The Bank of Japan, or Nichigin, is the central bank of Japan. It conducts monetary policy and issues currency to maintain the stability of the financial system. The bank’s Policy Board holds regular monetary policy meetings, deciding on its approach to interest rates and how it intends to influence inflation.
Who is the owner?
The Japanese government owns 55% of the bank and 100% of its voting rights. The remaining 45% is a public offering, traded as JASDAQ. As of August 2019, the BoJ governor is Haruhiko Kuroda, who has held the position since March 2013 and is currently serving his second five-year term, which is scheduled to last until April 2023.
Main economic tasks
The BoJ sees its core duties as:
- Maintain the stability of the financial system
- Maintain price stability
Maintain the stability of the financial system
The BoJ conducts its monetary policy with the aim of maintaining the stability of the financial system, which includes currency control, currency management, and the issuance of banknotes. This also contributes to the BoJ’s other core goals, as currency and currency management are part of the plan to achieve price stability and economic growth.
Maintain price stability
Maintaining price stability is another central goal of the BoJ. Exports are essential to Japan, so the BoJ tries to keep prices as stable as possible and will adjust interest rates with the intention of growing the national economy. The Bank defines ‘price stability’ as a 2% annual increase in the Consumer Price Index (CPI).
How does the BoJ carry out its duties?
The BoJ holds regular Monetary Policy Meetings (MPMs), where it sets official interest rates and other monetary policies in the hope of achieving price stability and financial system stability. MPMs are held eight times a year and last for two days, during which the Policy Board (the Governor, two Deputy Governors, and six other members) discuss and implement monetary policy. As of July 2018, the base rate remains at -0.1% in the hope of stimulating the economy.
Bank monetary policies affect the YEN
Japan has been struggling with a weak economy and very low inflation for the past few decades, consistently failing to hit 2%. The BoJ has adopted a so-called easy monetary policy, keeping interest rates low in hopes of boosting the economy.
When low interest rates discourage saving, the idea is that people will spend more, putting money into the economy and encouraging inflation. This has seen the yen weaken further against major currencies, including the US dollar and the euro, since Kuroda took office.
The USD/JPY exchange rate went from 94.00 in March 2013 to over 125.00 in June 2015, after Kuroda announced his first policy measures. And while there have been many fluctuations since then, the value of the yen remains well below where it was when he became governor, with USD/JPY at around 108.00 in July 2019.
USD/JPY chart shows price volatility around important BoJ announcements
After a period from 2012 to 2013 when the yen was relatively strong against the US dollar, it fell to 125.00 USD/JPY in June 2015 following the announcement of Kuroda’s initial policy measures. The value fell again in January 2016, when Kuroda made the shock announcement that the bank would implement negative interest rates for the first time, charging -0.1% on deposits held at the bank. The policy was intended to induce financial institutions to withdraw their cash and invest it elsewhere, rather than lose money by hoarding it.
The announcement took markets by surprise, as Kuroda had recently told a parliamentary budget committee that he was not looking to make any policy changes at the moment. The yen fell against currencies including the dollar and pound, while the Nikkei 225 rose in the hours following his announcement.
How to Trade BOJ Interest Rate Decisions
The BoJ’s interest rate decisions are designed to increase spending and investment, which affects inflation. The change in demand for stocks and currencies when interest rates change can create forex trading opportunities. Even if interest rates remain unchanged, expectations surrounding key events such as monetary policy meetings can affect the forex market.
Short-term interest rates are fundamental in determining currency valuations, so traders will watch them closely. Here is 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 |
Trading interest rate decisions can be enhanced by:
- Follow our news and analysis, and trading forecasts to stay up to date with the market
- Join our Weekly Central Bank webinar for the most relevant information from major central banks around the world
- Stick to a trading plan – if the yen fluctuates, traders need to make sure they can afford to lose, as its value can go in either direction.
Things to note about BOJ and forex trading
- The Bank of Japan plays a fundamental role in determining the value of the yen.
- Short-term changes in interest rates are an important factor in currency valuation.
- Bank of Japan monetary policy meetings can affect the value of the yen, as this is when important decisions are made.
