Yen Falls Against Dollar and Pound As Bank of Japan "Doesn't Play Along"

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The Yen fell by more than half a per cent against key rivals after the Bank of Japan's tweaks to its policy settings disappointed a market looking for a more robust response to the country's above-target inflation levels.

Expectations were running high that today's Bank of Japan decision would see another shift in policy that would take the central bank closer to a potential interest rate rise. Japan's Nikkei newspaper reported Tuesday the Bank of Japan would announce it would allow ten-year bond yields to exceed the 1% ceiling.

The report whet the appetite of Yen buyers who see a significant upside for the currency in the event the Bank of Japan marches its policy settings back to normality. "Market hopes were high that the BoJ would at least give some indication of a future exit from ultra-expansive monetary policy," says Michael Pfister, FX Analyst at Commerzbank.

But the Bank of Japan voted unanimously to maintain its negative policy rate and also announced that the upper bound for Japanese Government Bond 10-year yields at 1% would act "as reference".

This is not the all-clear to a higher bond yield regime that the market might have been looking for. "The BoJ did not quite play along," says Pfister.

The disappointment resulted in a broadly weaker yen: the Dollar to Yen exchange rate is 0.80% higher on the day at 150.25, the Pound to Yen exchange rate is 0.60% higher at 182.45 and the Euro to Yen is 0.70% higher at 159.35.

"This move disappointed investors, lifting USD-JPY back above 150. This reaction made even clearer that for a trend reversal of the current USD-JPY strength, not only the Fed kicking off an easing cycle but also the BoJ starting policy normalisation are needed," says Roberto Mialich, FX Strategist at UniCredit.

The Bank of Japan's full-year 2024 core CPI forecast was raised to 2.8% versus 1.9% previously, which is a material upgrade that would be consistent with expectations for higher Japanese interest rates, bond yields and Yen.

Above: The Yen fell against all its peers as traders expressed disappointment to the BoJ's latest communications. Set up a daily rate alert email to track your exchange rate OR set an alert for when your ideal exchange rate is triggered ➡ find out more.

But the full-year 2025 core CPI forecast was kept below the 2% target at 1.7%, "which suggests that the bank is still not convinced of a sustained rise in inflation to the target level," says Alvin T. Tan, Asia FX Strategist at RBC Capital Markets.

Commerzbank's Pfister says the Bank of Japan seems reluctant to find an exit to its negative interest rate policy, which will ultimately keep the Yen under pressure.

"The Bank of Japan has definitely stuck to its line of not providing much clarity in its decisions with rather confusing communication regarding the YCC," he says.

YCC - or Yield Curve Control - sees the Bank of Japan buy government bonds to create the demand that will ensure the yield of these bonds remains at what it considers to be affordable levels (now considered to be 'around' 1.0%. This ultimately ensures the cost of money in Japan stays cheap, helping to boost the economy.

But this is a negative for the Yen in a world where yields are soaring. This means Japanese and international investors can achieve greater returns elsewhere, putting downward pressure on the Yen.

"Today's decision casts doubt on whether the BoJ is at least considering an exit from ultra-expansive monetary policy in the near future," says Pfister.

"It is not surprising that the market perceives this as further dovish and punishes the yen. In the absence of any signs of intervention from the Japanese Ministry of Finance, USD-JPY should continue to trend higher in the coming weeks," he adds.