Yen is becoming a highly volatile currency

01/18/2023

1 minute read

2023.01.18 09:57

On Wednesday, the Japanese yen experienced a sharp decline. It is trading at 129.38 in the European session, up 0.96 percent. The yen dropped as low as 131.58 earlier in the day, but it has recovered some of today’s losses.

The Japanese yen is showing strong volatility today after a quiet week. This comes in the wake of the policy meeting held by the Bank of Japan, at which policymakers defied the expectations of the market by not altering the rates and yield curve control (YCC) settings.

Since the BoJ increased the band on JGBs in December, the markets had been on high alert, and there was speculation that the BoJ would increase the band or even eliminate its control over the yield curve entirely at today’s meeting. The yen fell as much as 2.6% before recovering due to the central bank’s decision to remain neutral.

The BoJ’s non-movement dominated the forecasts for GDP and inflation, which showed little change. For FY22, the GDP forecast was lowered from 2.0% to 1.9%, and for FY23, it was lowered from 1.9% to 1.7%.

The forecast for inflation for FY22 was raised from 2.9% to 3.0%, while the forecast for inflation for FY23 remained the same at 1.6%. Due to the weak Japanese economy, growth risks are skewed downward, and the Bank of Japan is unlikely to alter its ultra-loose policy before the new BOJ Governor takes over in April.

As a result of the BOJ’s decision to maintain YCC, yields on Japanese government bonds have significantly decreased, falling below the 0.50% ceiling to as low as 0.36%. The BOJ had to spend trillions of yen to defend the cap after it had been attacked recently.

As speculators test the BoJ’s resolve to defend the cap once more, I wouldn’t be surprised to see yields rise in the short term.

USD/JPY Daily Chart