BoJ’s policy tweak fails to support Japanese yen

Yen edges closer to 151 vs. USD after BoJ meeting

The Japanese yen once again declined on Tuesday after the Bank of Japan's (BOJ) modest step towards unwinding years of monetary stimulus failed to appease some investors who had anticipated a bigger move.

At the end of its two-day policy meeting on October 31, the BOJ maintained its -0.1% target for short-term interest rates and announced its intention to keep the 10-year government bond yield at around 0%, in line with its yield curve control (YCC) policy. However, the central bank redefined 1.0% as a flexible "upper bound" rather than a strict cap.

It also eliminated the commitment to safeguard this level by offering to purchase an unlimited quantity of bonds.

Despite the BoJ’s policy announcements, the yen saw a decline of 0.9%, reaching a level of 150.37 against the dollar, inching closer to the one-year low of 150.78 recorded last week.

"The 1% is no longer a strict cap and so that means they will allow for JGB yields to rise above 1%. To some extent, this is as good as quietly allowing YCC to fade in the background," Christopher Wong, a currency strategist at OCBC told Reuters correspondents Rae Wee and Joice Alves on Tuesday.

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BoJ meeting: Analysts see de-facto elimination of Japan’s contentious YCC regime.

Marcel Thieliant, head of Asia-Pacific at Capital Economics, was firm in his assessment, telling the news agency that the BoJ had abolished the yield curve control regime:

"The Bank of Japan today de facto abolished YCC, and policymakers might call time on negative interest rates as soon as January. A casual reading of today's BOJ statement would suggest that policy settings were left unchanged - the bank continues to target a JGB yield of 0% and it retained its 1% yield cap.

The bank, however, now sees that 1% cap as a "reference" and it will no longer enforce the cap by offering to buy unlimited amounts of bonds via fixed-rate auctions every day. Instead, the bank will only conduct fixed-rate auctions if that is "deemed necessary", and at a yield that takes into account market conditions rather than any pre-defined level. That means that the YCC is now de facto over, but it remains to be seen how rapidly the BOJ will slow its bond purchases."

Christopher Wong, a currency strategist at OCBC in Singapore, was slightly milder than Capital Economics’ Thieliant, saying it was a “matter of time” before the Bank of Japan moves away from the YCC:

“The 1% is no longer a strict cap and that means they will allow JGB yields to rise above 1%. To some extent, this is as good as quietly allowing the YCC to fade in the background. The USD/JPY reaction is a reflection of the disappointment with BOJ's underwhelming tweak.

It is likely just a matter of time when the BOJ moves away from the YCC, negative interest rate policy regime as inflationary pressures are rather sustained so far this year. Sentiment is improving and upward pressure on wage growth remains intact.”

Yen forecast: ING says USDJPY my head to 152, prompt BoJ intervention

Chris Turner, Global Head of Markets at Dutch bank ING, said his team saw the USD/JPY currency pair potentially moving towards the 152 level, where the Bank of Japan may step in to prop up the yen:

“USD/JPY is trading above 150 again as the Bank of Japan once again disappoints expectations of an exit from its Yield Curve Control (YCC) strategy. Accompanying today's release was [a diagram] showing how 1% in the 10-year JGB yield is no longer a fat red line (hard cap) but now becomes a reference rate around which the BoJ will be 'nimbly conducting market operations'. One gets the sense from the BoJ that it is wary of JGB yields spiking, and that is why it is acting so very carefully here. At the same time, the change in inflation forecasts was insufficient to support views of an exit to YCC policy. CPI ex food – which is the BoJ's target – is still forecast at 1.7% in FY25 - i.e., not above 2% in a stable manner.

[…] Today's BoJ meeting has not triggered the reset on how we view the yen and the risk is now that USD/JPY pushes ahead to 152 and prompts the central bank into aggressive FX intervention.”

At the time of writing, the dollar to yen exchange rate stood at 150.97, with the yen declining by 1.25% against USD on the day, as per MarketWatch data. The DXY dollar index was steady at 106.47, having gained 0.33% on the day.

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