Japanese Yen Falls On Fears Bank of Japan is Sleepwalking Into Forever-NIRP

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The Japanese Yen fell by over half a per cent against the Pound, Dollar and Euro after the Bank of Japan maintained settings at its December policy update and gave no indication it was close to exiting its Negative Interest Rate Policy (NIRP).

This proved a disappointment to some corners of the market that had latched onto recent hints that an end to NIRP might be approaching, with some reckoning the BoJ could have raised rates today.

However, the BoJ offered no hints such a development was necessary, leading some analysts to warn Japan had missed its chance and could now be locked into a perpetual negative interest rate future.

"Trapped in ZIRP forever and ever?" asks Antje Praefcke, FX Analyst at Commerzbank, in a note responding to the BoJ's December guidance. Her verdict is the BoJ shows no signs of moving toward "less ultra-expansionary".

"I remember writing a long time ago that I feared the BoJ had missed the moment to exit," says Praefcke, "I would like to put my finger in this wound once more."

"The market reaction demonstrates that the decision is being interpreted in a dovish light," says Henry Allen, a strategist at Deutsche Bank. "The Japanese Yen is the weakest-performing G10 currency."

The Pound to Yen exchange rate is seen 0.68% higher at 182.19 in the wake of the decision, the Euro to Yen is 0.62% higher at 156.97, the Dollar to Yen exchange rate is 0.60% up at 143.65.

"The longer the BoJ waits, the harder the exit will be," says Praefcke. "The market once again bet on this and was again disappointed."

The Bank of Japan wants to see inflation "exceed 2 percent and stay above the target in a stable manner" before raising interest rates.

Yet, as Commerzbank notes, inflation rates in Japan are gradually falling, and Friday's data for November should confirm this.

"Under these conditions, at some point hardly anyone will really believe anymore that the BoJ can exit its zero interest rate policy (ZIRP), but that it will be trapped in it forever," says Praefcke.

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"In the end, the BoJ seems to be acting with a focus on the huge national debt and is therefore trapped in ZIRP forever and ever," she adds.

Commerzbank strategists say Dollar-Yen is only likely to be driven by the dollar side in the future.

"In other words, in the end, it will never be about yen strength, but always about dollar weakness when USD-JPY falls (for example, because Fed rate cut expectations are rising, as is the case now)," says Praefcke.

This implies the BoJ can only hope for dollar weakness if it wants a stronger yen; by the same token, it will struggle to engineer Yen's weakness when required.

"By hesitating for (too) long, the BoJ has, in my opinion, taken away a lot of room for manoeuvre in the future and put the fate of the yen in the hands of the Fed or the dollar," says Praefcke.

Governor Ueda today said the idea of rushing to change BoJ policy because the Fed is likely to cut rates in three or six months is "inappropriate".

Instead, he will be focussed on upcoming wage developments, judging that higher settlements can contribute to inflation anchoring close to 2.0%.

Investors still believe NIRP can end, with market-implied pricing showing they are positioned for a 45% chance of a shift priced in for the January meeting and a 93% chance priced by April.

"The BoJ is likely to exit its negative rate policy in Q2 next year, using the spring wage negotiations as a pretext, even though policy tightening probably won’t be warranted by the economic and inflation data by then," says Duncan Wrigley, Chief China+ Economist at Pantheon Macroeconomics.