Japanese Yen Could Drive GBP/JPY Sub-158 as BoJ Eases Up On Yields
- Written by: James Skinner
-
"The Policy Board of the Bank of Japan decided to modify the conduct of yield curve control in order to improve market functioning and encourage a smoother formation of the entire yield curve, while maintaining accommodative financial conditions" - Bank of Japan.
Image © Leonid Andronov, Adobe Stock
The Yen surged across the board after the Bank of Japan (BoJ) unexpectedly increased the upper limit for the 10-year government bond yield in a surprise decision that is potentially a game changer for the Japanese currency and one that could push GBP/JPY below 158 promptly.
Japan's Yen rose sharply after the Bank of Japan said it will allow the 10-year bond yield to rise as far as 0.5%, up from 0.25% previously, in a decision intended to "improve market functioning and encourage a smoother formation of the entire yield curve, while maintaining accommodative financial conditions."
"The BoJ will purchase whatever amount JGB's are necessary to keep the 10yr at 0.5%.In-line with this commitment the BoJ has announced an unscheduled ¥600bn bond-buying operation today," says Stephen Halmarick, chief economist at Commonwealth Bank of Australia.
"This wider JGB range will now likely stay in place well into 2023. We expect the BoJ will want to wait and see the outcome of the annual wage negotiation round (Shunto) in March/April 2023. This will allow them to monitor inflation expectations before making any further changes to policy," he adds.
While the BoJ characterised its decision as being intended to make its monetary easing programme sustainable, it did also acknowledge that rising bond yields would have tightening-like effects through their impact on other lending rates across the economy.
"We view this decision as a major surprise, as we had expected any widening of the tolerable band to be made under the new BOJ leadership from spring next year, similar to the market," says Naohiko Baba, chief Japan economist at Goldman Sachs.
The BoJ's abandonment of its earlier 0.25% limit on the 10-year yield is akin to a small increase in interest rates and a potential game changer for the speculative market in which the Japanese Yen has been the largest 'short' position throughout the year including in the latest positioning report.
"Now that pandora's box has been opened at the BOJ, there is very little from stopping the market from anticipating more changes. That implies asymmetric upside for the JPY as the inflation and rates backdrop reinforce appealing longer term valuations," says Mazen Issa, a senior FX strategist at TD Securities.
"We have liked strategic JPY upside vs. CAD and EUR, and we expect more gains ahead. Meanwhile, USDJPY downside will persist; 130/132 will be the next major reassessment area," Issa writes following the BoJ decision.
The Japanese Yen could benefit significantly further if Tuesday's BoJ decision leads speculative bets to be unwound en masse while GBP/JPY would likely fall to 158 and below if TD Securities' Issa is right about USD/JPY extending losses to 130 in the days ahead.