BoJ sticks to ultra-loose policy, Japanese yen slides vs. USD

Japanese yen takes a hit as BoJ stays cautious and sticks to ultra-loose monetary policy

On Tuesday, the Japanese yen declined against a range of currencies following the Bank of Japan's (BoJ) anticipated decision to maintain its ultra-loose monetary policy without signaling an imminent change. Surprisingly, the dollar remained at the lower end of its recent range while the BoJ refrained from hinting at any policy adjustments.

The dollar surged by 1.3% against JPY, and the euro to yen rate saw a slightly larger increase, with both currencies marking their most substantial daily gains since the end of October, which coincided with the BoJ’s previous meeting that also left markets disappointed.

The USD to JPY exchange rate reached 144.95 yen, while the EURJPY traded at 158.56. The GBP to JPY rate also saw a decline in the latter’s value, with the pound to yen pair trading at 183.89 (up 1.81% on the day).

Lee Hardman, senior currency analyst at MUFG, responded to the policy meeting in a comment to the Reuters news agency:

"Everyone is trying to jump on the last trade of the year. The message from the BoJ today is that they are still very cautious and there is no strong indication that they are getting close to raising rates”.

BOJ governor Kazuo Ueda BOJ told a press conference:

"The prospects for (sustainably achieving our inflation target) are gradually heightening. But in terms of whether the threshold would be met, we'd prefer to look at more data”.

Although the outcome aligned with market expectations, investors were vigilant for signs indicating whether the dovish central bank might eventually move away from negative interest rates.

In his morning notes on Tuesday, Markets.com Chief Market Analyst Neil Wilson pointed out that there still could be a “festive surprise” from former BoJ Governor Haruhiko Kuroda, who is due to deliver a speech on Christmas Eve:

“USDJPY extended its rally as yen bulls were left disappointed by yet more dovishness from the Bank of Japan. The BoJ was unchanged with policy and said they’re not in a rush to raise rates until the spring wage negotiations. Governor Ueda said ‘it is difficult to present a firm picture on exit (from ultra easy policy)’ and that they ‘don't have a detailed picture on what steps and the order of it when it comes to exiting negative interest rates’. If you fancy a festive surprise though, Kuroda is due to deliver a speech on Christmas Eve to Japan’s Keidanren business lobby group. And today he said that policy change could involve an element of surprise”.

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Yen forecast: ING sees “decisive” break for USDJPY below 140 in Q2 2024

In a Japanese yen forecast issued shortly after the Bank of Japan’s press conference, ING FX Strategist Francesco Pesole wrote that the BoJ would likely resort to normalising policy and deliver an interest rate hike in April next year:

“[...] We identified a few changes in the Bank’s assessment of the economic outlook that likely endorse the market’s lingering expectations for a hike in April. In particular, the BoJ noted that private consumption has continued to increase modestly, that inflation is likely to be above 2% throughout the 2024 fiscal year and that underlying inflation is likely to increase. Those statements are aimed at paving the way for policy normalisation in 2024, in our view. We expect the yield curve control to be scrapped in January and a hike to be delivered in April.

From an FX perspective, the yen may simply revert to trading primarily on external factors (US rates in particular) after the BoJ ignored market pressure and likely signalled the path to normalisation should be a gradual one. We remain bearish on USD/JPY in 2024, as the oversold yen can still benefit from the end of negative rates in Japan and we see the Fed cutting rates by 150bp, but the pace of depreciation in the pair will be gradual in the near term, and we only see a decisive break below 140 in 2Q24”.

Currency markets: Dollar index stays stable, pound rises

In other currency movements, the pound strengthened against the dollar, with the GBPUSD rate gaining 0.47% to reach $1.2707, outperforming the euro, which rose by 0.16% to $1.0941.

The U.S. dollar index registered a small decline of 0.30% to trade at 102.27. While it stayed above last week's four-week low of 101.75, it has recorded a fall of over 4% since early October. In its meeting last week, the Federal Reserve proved surprisingly dovish, providing reassurance to investors anticipating rate cuts in 2024 and contributing to the dollar’s overall downward trend.

Stock markets have surged following the Fed’s rate cut cues, with the Dow Jones Industrial Average recording multiple record highs in recent days.

When considering foreign currency (forex) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.