The yen’s wild ride in the aftermath of a surprise tweak to Japan’s yield-curve control program may be only the beginning, with a divergence of views on where the currency goes from here.
(Bloomberg) — The yen’s wild ride in the aftermath of a surprise tweak to Japan’s yield-curve control program may be only the beginning, with a divergence of views on where the currency goes from here.
After four straight days of strengthening versus the dollar, the yen whipsawed when Bank of Japan Governor Kazuo Ueda wrong-footed traders around midday Friday in Tokyo with a policy statement that markets are still trying to digest. The currency weakened around 1%, only to strengthen by the same amount, and then start depreciating again — all within an hour. The choppiness continued throughout his press conference, even as the magnitude of the moves narrowed.
The weight of strategist views is tilted toward yen strengthening, with the likelihood of further gains in Japanese government bond yields backing this case. Yet the price action Friday suggests traders aren’t so sure, and the yield gap remains wide between Japan and other key markets like the US.
“Some saw this as a step toward normalization of BOJ’s ultra-loose monetary policy while to others it was simply a move to get flexibility to cope with the side effects of the program,” said Tsutomu Soma, a bond and currency trader at Monex Inc. “The choppy trade near the 140 line against the dollar may continue for a while.”
Yen was at 139.70 to the dollar at 6:02 p.m. in Tokyo.
The International Monetary Fund said this week that Japan’s inflation risks were to the upside and that the BOJ should be flexible and perhaps move away from the yield-curve control. A gauge of inflation in Tokyo came in above expectations on Friday.
Friday’s statement from the BOJ kept the target for 10-year bond yields at around 0% and said its 0.5% ceiling on yield movements was a reference point not a rigid limit. It also said it will aim to control yields flexibly and will buy 10-year bonds at 1% every business day.
“My sense is that the hidden motivation for the BOJ is the exchange rate, because the too stringent conduct of YCC could invite undesirable yen weakening going forward,” said Kazuo Momma, former BOJ assistant governor and Mizuho Research & Technologies executive economist. “The BOJ doesn’t want to repeat the same mistake as it did last year so it’s more flexible this year.”
The yen had already surged and benchmark bond yields had breached the BOJ’s 0.5% cap ahead of the meeting, after the Nikkei reported that officials would discuss letting yields rise above the ceiling by a “certain degree.”
“The BOJ’s decision makes it clear that the tweak is totally different from a rate hike and leaves Japan isolated,” said Shinji Kunibe, a lead portfolio manager at the global fixed-income group of Sumitomo Mitsui DS Asset Management in Tokyo. Structural weakness in the yen will remain in place, he said.
“Foreign investors may interpret that the Bank of Japan has also scaled back its easing measures and buy the yen,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank. “Dollar-yen might see downward pressure as this is a makeshift measure allowing the interest rates to rise.”
–With assistance from Tania Chen, Matthew Burgess, Karl Lester M. Yap, Yasutaka Tamura and Masaki Kondo.
(Adds investor comment.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.