USD/JPY Rises Despite Bank of Japan YCC Flexibility



The Bank of Japan (BoJ) has been on the far dovish side of the monetary policy spectrum, since it has been troubled by decades of deflation and struggles to create a virtuous price-wage cycle. This is in stark contrast with its US counterpart that has delivered 525 basis points of rate hikes in little over a year, in a differential that has been detrimental to the Yen.

Inflation (ex-fresh food) had risen to the highest level since 1981 in January (4.2% y/y) in Japan and although it is off this peak, it has been printing above the 2% target for nearly a year. The central bank upgraded its outlook, now forecasting a median of 2.5% for FY2023 (from +1.8% previously), but believes it has more work to do for achieving the target sustainably.

Expectations for policy normalization have been mounting after the door opened last December with the widening of the yield curve and given the sustained weakness of the currency, that has recently sparked another round of verbal support by government officials.

In a balancing act on Friday, policymakers kept the +/-0.5% fluctuation range of the 10-year yields in place, but said it will now offer to buy JGBs at 1%, essentially loosening the yield curve control. On the one hand, this constitutes another step towards an eventual exit from the ultra-loose policy setting that should benefit the Japanese currency.

On the other hand, the BoJ maintained its dovish stance and opted for an implicit tweak to the yield curve control (YCC). The stealth nature of the YCC widening has made the bank's policy more unconventional and could actually allow it to keep it in place for longer, disappointing hawkish expectations and Yen bulls.

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After the initial volatility, USD/JPY rose on Friday and extends its gains today, which brings it closer to the September 2022 FX intervention level (145.90). The Fed meanwhile did not offer forward guidance last week and although markets believe it has reached the peak, strong economy and tight labor market keep more hikes in play.

However, further strength creates risk for renewed intervention by Japanese authorities (verbal or actual), while even if implicit, the YCC tweak could weigh on USD/JPY. As such, there is risk for pressure back below the EMA200 (at around 140.70), although strong catalyst would be needed for 137.20 to be challenged.

Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

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