Japanese Yen and the BoJ: What you should know

During the last few weeks, investors and traders have been focusing their attention on the Japanese Yen as well as the Japanese economy. The Bank of Japan surprised market analysts in December as it unexpectedly altered a part of its monetary policy. In this blog, we will explain why the Japanese Yen made the headlines of financial news outlets and how the Bank of Japan’s decisions have affected the country’s currency value.

Let’s talk about the Japanese Yen

The Japanese Yen is the third most traded currency in the world, following the US dollar and the euro. The Yen is also the most traded currency in the Asian continent. Its name translates to “circle” in English, and it went into circulation for the first time in 1871. Traders will probably know the currency’s code which is JPY.

The Bank of Japan’s monetary policy and the Japanese Yen

One of the missions of the Bank of Japan or BoJ, as you will often read in the news, is the implementation of monetary policy. At its December 2022 meeting, the BoJ’s governing board convened to decide on interest rates.

The council’s members announced that they would keep borrowing costs on hold but surprised markets with an unexpected tweak to its bond yield control that allows long-term interest rates to rise more. Some policymakers suggested that the BoJ’s move would help make the stimulus program more sustainable rather than a step toward ending its ultraloose monetary policy.

The Japanese Yen hit a 4-month high against the US dollar right after the end of the board’s meeting.

BoJ’s minutes published just before New Year’s Eve revealed that the bank’s board scrutinised data showing changes in Japan’s price outlook. According to economists, these changes could be the starting point for a stimulus reduction when the current Governor Haruhiko Kuroda departs. 

What is the yield curve control policy?

The BoJ adopted the yield curve control policy in 2016, trying to stop interest rates from falling too low. Japan’s central bank buys vast amounts of 10-year government bonds to control JGB yields at around 0%. December’s policy tweak allows long-term yields to fluctuate plus and minus 50 basis points, doubling from the previous 25 bps range. Some economists suggest that the BoJ’s decision could effectively be seen as a rate hike.

Some market analysts have criticized the BoJ’s policy as they suggest it influences market pricing and makes the Yen weaker, increasing the cost of imported materials needed for various industries.

BoJ’s meeting in January disappoints markets 

The BoJ’s move in December left investors and traders waiting for more aggressive decisions by the board. However, BoJ’s policymakers decided to keep interest rates unchanged as well as the bank’s yield curve control policy.

In its post-meeting statement, the council noted that “the Bank needs to continue with the current yield curve control, considering the outlook that it will take time to achieve the price stability [inflation] target of 2% in a sustainable and stable manner.”

As a result, the Japanese Yen fell 2.4% against the US dollar in less than three hours on January 18th. January meeting minutes showed that the board intends to keep long-term interest rates low, suggesting the BOJ was in no rush to phase out its stimulus program. Japan's core CPI in December rose 4.0% on an annualised basis, hitting a fresh 41-year high.

Japanese Yen: What can we expect?

Speaking to CNBC right after the BoJ’s meeting (Jan.18) and the Yen’s drop, Nomura’s head of FX strategy, Yujiro Goto, suggested that “in the medium term, over the next 2-3 months, I think the trend for the yen should be still on the downside towards 125, even after the disappointment today.” He also reiterated that the Japanese Yen could strengthen on hopes of a policy shift when Haruhiko Kuroda’s successor takes over.

A report by the Bank of America, released on January 24th, said that “we would sell USD/JPY rallies, as we believe the BoJ unconventional policies are not sustainable, and our inflation forecast in Japan for 2023 is well above the market consensus – 3% vs 1.9%.”

Analysts at the International Monetary Fund (IMF) suggested that the BoJ should allow bond yields to move more flexibly, adding that if significant risks materialise, the central bank should be ready to withdraw its stimulus more strongly, such as hiking short-term interest rates.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.