USD/JPY: Fed's tapering to alleviate the risk of yen appreciation – Natixis

On the back of a fast-economic recovery and rising inflation in the US, Fed Chair Powell formally announced that the Federal Reserve would start tapering this year at the recent Jackson Hole Central Bank gathering. Who can benefit the most from the Fed’s tapering? In the opinion of Alicia Garcia Herrero, Chief Economist Asia Pacific at Natixis, the Bank of Japan.

The Fed tapering is clearly good news for the BoJ

“The Fed’s tapering should alleviate the risk of yen appreciation. With an expectation that the surge in US inflation is temporary, higher nominal US bond yields through tapering could not only reduce the risk of a yen appreciation but perhaps even weaken the yen.”

“A weaker yen would support the recovery of the Japanese economy which still relies on external demand, especially in the light of tighter social distancing measures in Japan dragging consumption. As economic growth and inflation are positively correlated, a recovery driven by exports could lift the core CPI inflation from +0.4% YoY in July, which is still well below the BoJ’s 2% inflation target.”

“The Fed tapering is clearly good news for the BoJ to keep some of the increasingly limited bullets in its toolbox. The recent monetary review of the BoJ was opening the door to potential additional cuts if needed, especially if the Yen were to appreciate strongly. The FED tapering can, thus avoid an additional cut and/or yen appreciation. The BoJ must, thus, be rejoicing about Powell’s announcement while so many other central banks are fearing it.”