Here are the basic details about the monetary base of the Japanese yen on an annual basis
The monetary base is the total amount of currency in circulation as well as the reserve balances held by commercial banks at the central bank. For the Japanese yen, this is tracked and reported by the Bank of Japan (BOJ).
Key points about the monetary base of the Japanese yen on an annual basis:
- It measures the percentage change in the total monetary base compared to the same month of the previous year..
- The monetary base is a key measure of monetary policy in Japan, as it represents the basic liquidity in the financial system.
- The Bank of Japan uses its monetary base as a primary tool to implement quantitative easing programs, adjusting them to provide the required level of liquidity.
- The high year-on-year growth rate in the monetary base generally indicates an expansionary monetary policy by the Bank of Japan, as it injects more yen liquidity into the economy.
- Conversely, a lower year-on-year growth rate or a contraction of the monetary base may indicate a tightening of monetary policy by the central bank.
- Year-on-year changes in the yen’s monetary base can affect the Japanese yen’s exchange rate, affecting the total money supply and inflationary pressures.
- Market participants are closely following the monetary base data to gauge the BoJ policy stance and its potential impact on the yen, inflation and the broader Japanese economy.
In short, the year-on-year monetary base of the Japanese yen is an important indicator that provides insight into the Bank of Japan’s monetary policy actions and their potential effects on the currency and economy.
Currency base changes for the Japanese yen: expansion and moderation
The monetary base of the Japanese yen over the past year has undergone significant changes compared to previous years:
Continuous expansion:
- The Bank of Japan maintained its highly loose monetary policy, including asset purchase programs, to support the Japanese economy.
- As a result, the Japanese yen’s monetary base growth rate remained high year-on-year, although somewhat moderate from the peak levels seen in 2020-2021.
Moderation from its highest levels in the era of the pandemic:
- During the COVID-19 pandemic, the Bank of Japan has rapidly expanded its monetary base to provide liquidity and support the economy.
- The annual growth rate of the yen’s monetary base reached about 15-20% in 2020 and early 2021.
- However, over the past year, year-on-year growth slowed to around 5-10%, as the BoJ’s pandemic-era stimulus measures were gradually scaled back.
The difference from tightening global monetary policy:
- While many major central banks raised interest rates and canceled accommodative policies, the Bank of Japan maintained its cautious stance.
- This has led to the Japanese yen’s monetary base expanding faster than shrinking or flattening monetary bases in other major economies.
Possibility of future modifications:
- There has been growing speculation in the market about the possibility of the Bank of Japan adjusting its yield curve control policy and other monetary easing measures, especially as inflation in Japan began to rise.
- Any major policy shifts in the Bank of Japan could lead to more pronounced changes in the rate of growth of the yen’s monetary base in the future.
Overall, the Japanese yen’s monetary base has remained on an expansionary trajectory over the past year, albeit at a more modest pace compared to the peak of the pandemic. The deviation from the tightening of global monetary policy contributed to the yen’s weakening against other major currencies during this period.
USD/JPY weakened on US economic concerns and Japan’s interventions in June
The USD/JPY pair was in decline at the beginning of June, weighed down by narrowing spreads between yields and a whiff of concern about the trajectory of the US economy. Data releases in the coming days may provide clarity on the answer, providing significant price risk in two directions due to high levels of uncertainty.
Risks for US interest rates have always been asymmetrical around these levels, as the upside has been much harder to achieve than the downside since higher interest rates have increased the likelihood of a sharp economic downturn. We saw this effect on Monday as the ISM Non-Manufacturing PMI led to a massive rally across the US Treasury curve, led by the short end which is heavily influenced by the Fed’s interest rate outlook.
Two-year bond yields fell by 8 basis points, putting them within striking distance of what they described as something of a line between the higher and longer narrative. Markets now prefer two Fed rate cuts in 2024 rather than one.
So why the big reaction in the bond market? While the details were undeniably weak with activity contracting at a faster pace in May, while major indices such as new orders fell, arguably the large bond supply was equally driven by where yields were stabilizing until just a few days ago.
Until last week, two-year bond yields were close to 5%, a level they struggled to exceed during the Fed’s tightening cycle. But, with the Fed’s preferred inflation measure, the core PCE deflator, revealing a resumption of the gradual deflation trend after a hot start to the year, the focus has now shifted to how activity indicators hold.
