USD/JPY Sets Fresh 20-Year Highs, as BoJ Maintains Ultra Loose Policy

BoJ Ultra Easy Monetary Policy

The Bank of Japan (BoJ) kept interest rates at -0.1% today, will continue with Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control in order to achieve the 2% inflation target and expects short- and long-term policy interest rates to remain at their present or lower levels. ^[1]

After another round of intervention in the bond market this week, the central bank reiterated its pledge to buy limitless amount of government bonds (JGBs), so that the 10-year yield will remain at around zero percent, adding that it will offer to purchase 10-year JGBs at 0.25% on every business day.

The central bank also released its updated economic projections, which see higher inflation and slower growth for the current 2022 fiscal year. In particular, median CPI inflation forecast was raised to 1.9%, from 1.1% in the previous projection, while median forecast for GDP is now 2.9%, from 3.8% projected in January. ^[2]

The central bank's activity harms the Japanese Yen and while a weak currency is generally viewed as helpful for the country's exporting activity, inflation and higher energy and commodity prices create problems. We have seen some commentary recently, warning of this, while a Reuters poll earlier in the month, showed the majority of Japanese companies are worried over the Yen's weakness. ^[3]

Monetary Policy Divergence

The Bank of Japan maintains its uber-easy monetary policy, which is in stark contrast with its major counterparts, including the US Federal Reserve, which has embarked on an aggressive tightening path in order to combat surging inflation.

The Fed hiked rates by 25 basis points in March and concluded its asset purchases program, which expanded its balance sheet to nearly $9 trillion. Since then, officials have hinted that the reduction process could begin as early as at next week's meeting, while pointing towards a larger 50 basis points increase in interest rates.

Chair Powell alluded to that prospect with his remarks in a panel discussion of the International Monetary Fund last Thursday, saying that "I would say 50 basis points will be on the table for the May meeting". ^[4]

USD/JPY Analysis

The policy differential between the two central banks is the main driver of the Yen's weakness against the greenback and don't allow it to benefit from various risk factors and take advantage of its safe-haven status. The pair runs its eight straight profitable weak, which is the longest streak since 2013, while rallying around 8% in April, heading towards potentially the best month since 2016.

After today's BoJ announcement, USD/JPY rose to fresh twenty-year highs, with around 1.5% of gains. It now sets its sight to the 131.62-132.05 region, but it may be early to talk about 133.89.

From a purely technical prospective the move is stretched, while month-end flows could potentially work against it, given April's massive rally. As such, a pulback that could test 129.00 would not be surprising, but a strong catalyst would be required for a bigger correction towards 126.96-88.

From today's economic calendar, we expect US Q1 GDP and on Friday US PCE inflation stands out, while Japan gears up for the Golden Week holidays (May 3-5), while the country's stock market will also be closed tomorrow.