Japanese Yen Rockets After BoJ Shocker

12/20/2022

1 minute read

2022.12.20 11:38

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MarketPulse

The Japanese yen sent the dollar tumbling on Tuesday. has fallen 3.26% and is trading at 132.44 in Europe. In the Asian session, USD/JPY fell as low as 131.99 but has recovered slightly.

Bank of Japan Tweaks Yield Curve Control

At the end of its policy meeting, the Bank of Japan stunned the markets with a change to its yield curve control (YCC). The BoJ announced it would widen the band around the 10-year bond yield to 50 basis points, up from 25 bp. The move allows long-term interest rates to rise higher and the reaction was deafening, as the yen soared and climbed to its highest level since August 11th. The move was completely unexpected, as the BoJ meeting was expected to be a sleeper with no policy changes. It was just yesterday that I wrote in these pages that the BoJ was not expected to change policy until the changing of the guard in April 2023, when Governor Kuroda steps down.

The BoJ move is certainly dramatic but needs to be kept in proportion. The BoJ is maintaining its YCC targets and said it would sharply increase bond purchases. This could be a signal that the Bank is tweaking its current ultra-loose policy and is not planning to withdraw stimulus.

The BOJ has staunchly defended its yield cap with massive bond purchases, and this has distorted the yield curve and fueled a sharp drop in the yen, which has contributed to higher costs for imports of raw materials. BoJ policymakers may have become uncomfortable with these side effects and felt that the time was right to take a small step toward normalization. This ‘baby step’ packed a massive punch as seen in the yen’s reaction, and the markets will be looking for hints at further moves from Governor Kuroda as his term winds down.

USD/JPY Daily Chart