The Bank of Japan is the most aggressive central bank in the world, employing negative interest rates and large amounts of quantitative easing. And for good reason — Japan is in its third decade in a fight to fend off deflation. How will it impact the Yen?
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USD/JPY is a safe-haven currency. Thanks to the low (even negative) interest rates in Japan, global investors can borrow Yen and convert it to other currencies, called a carry trade. As more and more investors do this, the exchange rate works to juice returns. The risk: uncertainty will cause everyone to rush for the exit of this trade at once and undo years of gains.
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USD/JPY has been all over the place in recent years. More so than the U.S. Dollar, the Japanese Yen enjoyed a flight-to-safety quality, which saw the currency pair fall to near 75 in October 2011 even as the Bank of Japan was accelerating its quantitative easing. Eventually, the Bank of Japan’s move worked to devalue the Yen to more than 125 per U.S. Dollar in 2015. Since then, the price has consolidated between 100 and 118, moving as the appetite for risk and risk aversion changes.
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