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Japanese yen weakens as Bank of Japan makes no change to yield curve range

Morning commuters outside the Bank of Japan (BOJ) headquarters in Tokyo, Japan, Monday, Jan. 16, 2023. The Bank of Japan made no changes to its yield curve control policy on Wednesday.

Bloomberg | Bloomberg | Getty Images

The Japanese currency weakened against the US dollar after the Bank of Japan surprised the markets by keeping its tolerance margin on the yield curve unchanged.

The japanese yen weakened 2.6% against the US dollar after the decision was announced and last stood at 131.47, standing at its highest levels since June 2022.

“The Japanese economy is expected to continue growing at a rate above its potential growth rate,” the Bank of Japan said in a statement. The central bank left its interest rate unchanged at an ultra-dovish -0.1% – in line with expectations and maintaining the same rate it has held since 2016.

The decision not to change its monetary policies comes after the central bank caught global markets off guard at its previous meeting by widening its tolerance range for the yield on its 10-year government bonds by 25 basis points. to 50 basis points in December.

Since last month’s move, 10-year JGB yields have breached the upper cap on several occasions.

The 10-year JGB yield broke its band’s upper cap for a fifth consecutive session on Wednesday morning before falling back to 0.385%.

‘Reflex

Nomura’s head of FX strategy, Yujiro Goto, said while the move would be disappointing for traders bullish on the Japanese yen, the currency’s weakening could be temporary.

“I think the initial reaction [for the yen reaching] 130 to 131, or potentially 132 is a knee-jerk reaction to today’s ‘no change’,” he said on CNBC’s “Street Signs Asia.”

“Medium term, over the next 2-3 months, I think the trend for the yen should still be down towards 125, even after today’s disappointment,” he said.

Goto said the currency would strengthen on hopes of a near-term policy shift, pointing to the near end of BOJ Governor Haruhiko Kuroda’s term.

The Bank of Japan's decision to keep the yield curve control policy unchanged is

“Markets must continue to wait [the BOJ] modify or modify [its] monetary policy after a while, especially after Kuroda’s retirement,” he said.

Shigeto Nagai of Oxford Economics said the BOJ’s decision to widen its band “fueled” expectations of further changes to come.

“Today the BOJ really wanted to calm this speculation and anticipation of normalization,” he said, adding that the central bank will continue to be under pressure to change.

More pressure to come

As inflation continues to rise in Japan, the central bank will face further pressure ahead of its leadership change.

“Inflation in Japan is doing something it hasn’t done in 40 years,” Vanda Research’s Viraj Patel said in a tweet, adding that the Bank of Japan risks “falling into” the same trap as the US Federal Reserve labeling inflation. as “transient”.

The Bank of Japan used language similar to the Fed’s description of inflation before the US central bank began continuously raising rates to rein in rising prices, describing it as a “pass-through”.

“The year-over-year rate of increase in the consumer price index is expected to be relatively high in the near term due to the effects of a pass-through to consumer prices of cost increases driven by a rise in import prices,” the central bank said in its latest statement.

The Bank of Japan has revised its core inflation forecast for 2023 nationwide from 2.9% to 3%. National inflation data is due Friday.

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