The yen strengthened and Japanese bond futures tumbled as investors weighed a local press report that the central bank will look at the side effects of its policy at next week’s meeting.
(Bloomberg) — The yen strengthened and Japanese bond futures tumbled as investors weighed a local press report that the central bank will look at the side effects of its policy at next week’s meeting.
The Bank of Japan will consider adjusting its bond buying and make further policy tweaks if necessary, Yomiuri reported without attribution. The BOJ shocked markets in December by raising the permitted ceiling for the benchmark 10-year yield under its curve-control policy, a move which strengthened the Japanese currency.
The yen rose as much as 0.8% to 131.37 per dollar. Ten-year Japanese bond futures fell to their lowest since 2014.
Strategists expect further policy tweaks from the BOJ in coming months, with a new governor set to take over from Haruhiko Kuroda from April. The BOJ’s policy tweak in December wasn’t the beginning of an exit of monetary easing, but a way to make it more sustainable, Kuroda said last month.
BOJ to End Yield-Curve Control Next Quarter, Strategist Says
“Expectations for the BoJ to exit its ultra-accommodative policy will remain a headwind for dollar-yen,” Carol Kong, strategist at Commonwealth Bank of Australia Ltd., wrote in a note. “Ten-year Japanese government bond futures and swap rates also remain elevated at just under 1%, indicating market expectations for more hawkish policy adjustments from the BOJ.”
The yen has climbed about 15% from its October nadir amid government intervention, hopes for slowing US rate hikes and speculation over the possibility of a policy shift from the Bank of Japan this year.
The cost of buying option contracts to hedge against moves in the currency has surged as traders brace for the impact of Thursday’s key US inflation data and next week’s BOJ policy decision. One-week implied volatility in dollar-yen — a gauge of expectations of swings over that time frame — has climbed to the highest since October.
–With assistance from Ryotaro Nakamaru and David Finnerty.
(Updates with bond futures move.)
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