What you should know about the BoJ and the Japanese Yen

Over the past few weeks, investors and traders have focused their attention on the Japanese yen as well as the Japanese economy. The Bank of Japan surprised market analysts in December when it unexpectedly changed part of its monetary policy. In this blog, we will explain why the Japanese yen has made the headlines of financial news and how the decisions of the Bank of Japan 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, after the US dollar and the euro. Yen is also the most traded currency in the Asian continent. Its name translates to “circle” in English, and it first went into circulation in 1871. Traders will probably know the currency’s code, which is JPY.

The monetary policy of the Bank of Japan 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 board convened to decide on interest rates.

The council’s members announced they would keep borrowing costs down, but surprised markets with an unexpected adjustment to its bond yield control, which allows long-term interest rates to rise. Some politicians have suggested that the BoJ’s move would help make the stimulus program more sustainable than a step to end its ultra-loose monetary policy.

The Japanese yen hit a 4-month high against the US dollar immediately after the board meeting ended.

BoJ minutes released just before New Year’s Eve revealed that the bank’s board examined 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 leaves.

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 is buying vast amounts of 10-year government bonds to keep the JGB yield around 0%. December’s policy adjustment 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 because they suggest it affects market prices and weakens the Yen, increasing the cost of imported materials needed for various industries.

The BoJ meeting in January disappoints markets

The move by the BoJ in December left investors and traders waiting for more aggressive decisions from the board. However, BoJ 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 should continue with the current governance curve, given the prospect that it will take time to achieve 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 18. The minutes of the January meeting showed that the board intends to keep long-term interest rates low, suggesting that the BOJ was in no rush to scrap its stimulus program. Japan’s core CPI in December rose 4.0% on an annual basis, hitting a fresh 41-year high.

Japanese Yen: What can we expect?

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

A Bank of America report, published on January 24, said that “we will sell USD/JPY rallies as we believe the BoJ’s unconventional policies are not sustainable, and our inflation forecast in Japan for 2023 is much above the market consensus – 3% against 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 materialize, the central bank should be prepared to withdraw its stimulus more strongly, such as raising short-term interest rates.

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This material does not contain and should not be considered as containing investment advice, investment recommendations, an offer or solicitation for any transactions in financial instruments. Please note that such business analysis is not a reliable indicator of 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 involved.