BoJ interference is dangerous as USDJPY continues to appreciate


Japanese PM Fumio Kushida has endorsed the BoJ's ultra-loose monetary policy. He acknowledged that the sharp falls in the yen were worrying but that exchange rates should be dealt with separately from monetary policy. This statement is odd, to say the least, as the ultra-loose monetary policy directly contributes to the yen's weakness.

The BoJ is defending the 25bps level on its 10 Yr. As a result, yields consistently test the level whilst attempting to break higher. However, given the current global inflationary environment, whether the central can defend this level indefinitely is debatable.

Keeping the yen so low is importing even more inflation into Japan, eventually leading to hiking rates. The central bank intervention is not allowing natural inflation controlling mechanisms to operate efficiently. This blockage poses a considerable danger because when the adjustment occurs, the pent-up energy will potentially lead to an enormous event as the market recalibrates.


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The top chart is a monthly chart of the spread between the US 10-Yr Treasury and the Japanese JGB (Japanese Government Bond). The differential is increasing rapidly, so the series's RSI is overbought (green rectangle). This excess is extremely rare - the last time the RSI was overbought was May 1994 (it was much briefer, much less orchestrated, and led to yen appreciation). The third chart show's the USDJPY. Again, the currency pair mirrors the spread appreciation to the point that its correlation coefficient is at an astounding 0.97 - almost a perfect positive correlation.

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.


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