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The yen extended its decline against the US dollar following the Bank of Japan’s (BOJ) announcement of a minor adjustment to its yield control program, falling short of market expectations for a more substantial change. The currency slipped below the 150 level against the dollar and remained there after the decision. This renewed concerns about potential Japanese government intervention to mitigate further abrupt currency movements.
Governor Kazuo Ueda’s statement regarding the adverse impact of currency volatility on the economy and price trends had minimal observable influence on the yen. He also reiterated the importance of stability and reflecting economic fundamentals in currency movements.
In the backdrop, Japan’s 10-year sovereign bond yield reached 0.95%, its highest level in a decade. Japanese stocks closed on a positive note, with the currency’s depreciation providing support. Banking stocks experienced a brief dip before recovering, as investors assessed the implications of Japan’s persistently ultra-low interest rates on lending margins.
BOJ’s measured adjustment to the Yield Curve Control (YCC) implies a gradual move towards policy normalization, albeit falling short of the market’s anticipation of more significant alterations. Consequently, the focus has shifted to potential currency intervention measures.
Particularly, the surge in Japanese Government Bond (JGB) yields has garnered global attention, prompting Japanese investors to repatriate funds to their domestic market. This phenomenon has ripple effects on the demand for various assets, including US Treasuries, European bonds, and Australian securities. Consequently, changes in global bond yields influence equity markets and other asset classes.
The central bank has removed its reference to daily bond purchases at a fixed 1% level, citing potential side effects of a rigid cap. Additionally, it has raised its inflation forecasts for the current and upcoming years.
Japan’s 10-year overnight index swaps are indicating an expectation of higher interest rates, standing at approximately 1.13% after the BOJ’s decision.
The yen has underperformed among G-10 currencies this year, with losses exceeding 10% against the dollar in both 2022 and 2021, largely attributed to the BOJ’s interest rate policy.
Juntaro Morimoto, Senior FX Analyst at Sony Financial Group Inc. in Tokyo, remarked, “In the short term, USD/JPY could go as high as 152.” This level would surpass the previous low of 151.95 recorded in October the previous year, reaching levels not seen since 1990.
The yen’s decline has fueled inflation, which has exceeded the BOJ’s 2% target since April 2022, primarily due to increased import prices. This situation has intensified the pressure on both the central bank and the government to take appropriate measures, as consumers grapple with rising living costs.
Market speculation about a possible adjustment to the yield curve control policy grew as the yen breached the critical threshold of 150 last week, and 10-year yields approached the central bank’s defensive line in anticipation of the meeting.
The BOJ has faced a challenging dilemma with its YCC approach, as taking action or maintaining the status quo both have associated costs. Policymakers were expected to closely monitor yield movements until the last moment before making their decision.
Market sentiment had increasingly leaned toward preparing for a policy tweak, amplified by reports from local media outlets in the 24 hours leading up to the conclusion of the BOJ meeting. The Nikkei suggested that policymakers might consider permitting the 10-year yield to temporarily rise above 1%.
