Bank of Japan (BoJ)

The Bank of Japan is an incredibly important player in currency markets.

Since the BoJ issues and oversees the supply of the Japanese Yen (JPY), one of the most traded currencies in the world, we must stay on top of it.

But what makes the Bank tick? And how many times does it decide on rates?

Let’s find out below.

Bank of Japan’s Mandate

The BoJ cares mostly about keeping inflation in check.

According to its official site:

“currency and monetary control by the Bank of Japan shall be aimed at achieving price stability, thereby contributing to the sound development of the national economy.”

So there you have it.

A beautiful view in Tokyo, Japan (where the BoJ is headquartered).

Once again, this does not mean the BoJ won’t take growth into consideration.

After all, curbing inflation with a rate hike slows down the economy, and in some cases, may cause a recession.

However, for decades now, the BoJ’s problem hasn’t been one of hiking rates.


Japan has been afflicted by deflation (negative inflation) for decades now.

What is deflation?

We won’t go in too deep here, but deflation is when prices go down.

How can this be a problem? You can now afford more stuff no?

Well, think about it this way:

If you wait 1 year to buy that car, you’ll save (let’s say) 2% of the purchase price.

Since it’s a luxury, you decide to wait.

One year has passed, and the price went down (as expected).

But now you think: Hmmmm…. If I wait another year it will be even CHEAPER.

What Deflation does to an economy…

Now imagine yourself doing this with every purchase you make…

And what happens if you’re not the only one thinking this way.

What if most people are foregoing consumption?

Do you see where we’re going here?

If people don’t consume because their money will be worth more later, producers won’t make sales.

If companies don’t sell, then production is dialed down.

Before you know it, the economy starts to shrink.

So yes, it’s bad. Very bad.

This is why the Bank of Japan has been easing conditions for so many years now (lowering rates, and increasing supply of Japanese Yens).

BoJ's Structure

The bank is its own autonomous entity. It isn’t a corporation nor a government agency.

BoJ’s highest authority is the Policy Board, which makes all monetary policy decisions and creates policy guidelines for the Japanese Yen (JPY).

The Bank of Japan’s Policy Board has nine members: the Governor, two Deputy Governors, and six other members of the Board.

Monetary policy decisions (including interest rate decisions) are made through majority vote at the Policy Board.

These decisions are voted upon in the so called Monetary Policy Meetings or MPMs which are held eight times per year.

So plenty of opportunities for pip making!

Bank of Japan and FX Markets

The Japanese Yen (JPY) is quite an interesting currency.

It is seen as a safe haven currency due to Japan’s characteristics (remember deflation? That’s only one of the reasons).

On top of that, given the rock-bottom interest rates the BoJ has kept for years now, JPY has become the currency of choice for financing positions across the globe.

Thus, when the markets have high risk appetite (greedy, stocks doing well for example), the JPY is sold more heavily than other currencies.

JPY: a good deposit of value in though times.

However, when the mood shifts to a risk-off tone, JPY gains big time, as the previous shorts become unwound.

Aside from this safe haven status, JPY is obviously affected by monetary policy conducted by the Bank of Japan.

However, in recent years, monetary policy has been accommodative (low rates) with very little inkling of a change occurring soon.

Which means, the BoJ hasn’t really had much of an impact on FX markets.

This situation will not hold forever though!

When the BoJ begins to shift this stance (and it will), man, will JPY rise like crazy.

Low Impact? Once the Bank of Japan shifts policy…

So when you trade JPY pairs you must be aware of the following:

1.    Has the BoJ’s accommodative stance begun to shift?

2.    Is any event causing a risk-off tone occurring right now?

3.    How exposed am I to safe haven flows if such an event happens suddenly?

As a rule, you have to be careful when shorting the JPY since safe haven flows (due to risk-off sentiment after an event creating uncertainty) occur suddenly.

If you’re buying it, then such an event might help you (yayyy).

And if you decide to trade based on safe haven flows, be careful since the move often begins to unwind during the same session (if it’s not something too serious).

Did you like this article?

Check some of its sisters: ECB, BoE, SNB, among others.

See you soon,

Emil Christopher,

The Forex Economist

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