Dollar-Yen: Bank of Japan Changes Can Reinforce Cap at 150

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The Dollar to Yen exchange rate is unlikely to breach the 150 level thanks to a potential shift in policy at the Bank of Japan that will allow a critical bond yield to test levels above 1.0%, in turn providing offering support to the JPY.

This is according to a new analysis from Rabobank, which says incoming news strongly hints at another shift in settings at Japan's central bank in a direction that will support the domestic currency.

"Given the potential issues involved with maintaining its yield curve policy at current settings and the risk that JPY weakness would accentuate any further strength in oil prices, we see another tweak to policy as likely being on the cards in the months ahead," says Jane Foley, Senior FX Strategist at Rabobank.

Foley's call follows reports the Bank of Japan will discuss raising its inflation projections for FY23/24 at the October 31 policy meeting.

"The market will likely infer from this that the chances of further normalisation in BoJ monetary policy may be increased in the coming months," says Foley. "Allowing JGB yields to push higher should remove some downside pressure on the value of the JPY."

The Bank of Japan announced in July it would allow the value of 10-year bond yields to creep above 0.5% as it eased its grip on the bond market in response to inflation levels that had moved above the 2.0% target.

However, it also warned it would not tolerate the yield creeping above 1.0%.

The Yield Curve Control policy sees the Bank buy Japanese government bonds to keep their yields down, keeping the cost of lending low.

The aim is to ensure money remains cheap enough to stimulate the economy, but a side effect of this has been chronic weakness in the Yen, which is unhelpful at a time of high oil prices.

Allowing the yield to test above here would represent a further tightening of policy that can support the Yen.

"While we expect that USD strength will dominate in the coming months, a policy tweak from the BoJ would likely reinforce psychological resistance in the USD/JPY150. Our forecast of a move back to USD/JPY 148 on a 1-to-3-month view, assumes further policy normalisation by the BoJ," says Foley.