Japan holds out on interest rates, yet Yen falls

The Japanese Yen has been fairing well against Western majors recently, especially in the light of recent interest rate increases by European, American and British central banks which have curbed the enthusiasm of many.

Interest rate rises are often associated with means of curtailing spending during periods of high inflation, and are almost considered to be last resort measures by central banks, as a rise in interest rates signals two things.

The first thing is that an interest rate rise sends a clear signal that a national economy is suffering enough from rising inflation that the government stepped in to take action, and the second is that it has a negative effect on people with existing borrowings such as mortgages, therefore causes the buying public to take a more thrifty approach to spending in case their mortgage repayments increase whilst their income does not.

Western markets in which major currencies are the sovereign currency have been suffering from rapidly rising inflation over recent months, and Europe, the United Kingdom and the United States are all experiencing similar economic climates with the highest inflation in four decades in the US and UK, and Europe's mainland not far behind.

Japan by contrast has been relatively stable. It did not participate in government-imposed lockdowns two years ago, and is far removed from the geopolitical turmoil that the Western governments have displayed to their electorates recently.

Therefore, Japan's inflation has not been anywhere near that of the West, however perhaps rather oddly, the Yen has been falling in value over the past few days.

The Bank of Japan has kept interest rates very low, and announced at the end of last week that it would continue its bond-buying program.

The Bank of Japan held its target for interest rates during the short term at minus 0.1% and is aiming to keep the cost of borrowing at current levels, or even lower than current levels.

Consumer prices in Japan have begun to rise, however the market reaction to the Bank of Japan's 'nothing to see here' announcement has been dramatic.

The US Dollar reached a peak against the Yen at the end of last week, directly after the announcement, at 135.6.

In 2022 so far, the US Dollar has gained 15% in value over the Yen, as the gap between Japanese low interest rates and those in the West continues to get wider.

In the US, the Federal Reserve effected its largest rate rise in 13 years on Wednesday last week, yet the Dollar is strong over most major currencies, the Yen being no exception.

These are very unusual times, to say the least.

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