The Dollar/Yen rose last week, primarily helped by the widening of the spread between U.S. Government Bonds and Japanese Government Bonds. The movement in the yields reflects the divergence between the hawkish Fed and the dovish BOJ. There was some selling pressure, however, late in the week related to safe-haven buying of the Japanese Yen, tied to US-China trade tensions.

The USD/JPY settled at 110.662, up 1.123 or +1.03%.

On Friday, the BOJ voted to maintain its ultra-loose monetary policy and downgraded its view on inflation, signaling that it will lag well behind its U.S. peer in rolling back crisis-era stimulus

The Bank of Japan kept its short-term interest rate target at minus 0.1 percent and a pledge to guide 10-year government bond yields around zero percent. As far as inflation is concerned, “Consumer price growth is in a range of 0.5 to 1 percent,” the BOJ said in a statement accompanying the decision.

Additionally, the BOJ continued to support its view the economy was expanding moderately, seemingly unaffected by the first-quarter contraction in GDP, brushing off the weakness on weather related issues.

However, the central bank also maintained its cautious assessment on prospects for hitting its elusive 2 percent inflation target, saying that inflation expectations were moving sideways. In April, for instance, core consumer prices rose 0.7 percent from a year earlier, slowing for the second straight month while casting doubt on the BOJ’s view a solid recovery will prompt firms to raise wages and help accelerate inflation to its 2 percent target.

Forecast

The longer-term view for the USD/JPY supports a continual rise due to the favorable interest rate differential between U.S. Government Bond yields and Japanese Government Bond yields. Short-term, however, we could see some selling pressure due to flight to safety buying into the Japanese Yen in reaction to a potential escalation in trade war fears between the U.S. and China.

Basically, it still comes down to the direction of Treasury yields. If U.S. stocks retreat because of trade war fears then investors are likely to seek shelter in U.S. Treasurys. This would drive yields lower. If yields fall then the dollar becomes a less attractive investment. Furthermore, a drop in equities will trigger the carry trade, where investors sell stocks and return the proceeds to Japan to pay off loans made in Japanese Yen.

This week, investors will get the opportunity to react to a speech by BOJ Governor Kuroda. He may reveal the central banks future plans on how to combat low inflation. He could also comment on trade issues with the United States. Recently, President Trump threatened to impose tariffs on auto imports. This proposes a threat to Japan’s export-reliant economy.