Japanese Yen Undone by Crafty Bank of Japan

Bank of Japan Governor Haruhiko Kuroda. Image © European Central Bank, reproduced under CC licensing

- "Super-easy BoJ policy is still very much in place"

- Yen's recent rally appears to have hit the brakes

- Seen drifting lower from here

The big event for FX markets this Tuesday was always going to be the Bank of Japan's latest monetary policy call, and the resultant moves in the Yen.

The BoJ also left its key policy balance rate at -0.1%. However, after much market speculation of a tweak to the YCC policy, the BoJ disappointed by maintaining the target around 0% and the Yen fell in response.

If anything, this could well be the BoJ punishing markets for believing unsanctioned reports on plans for future monetary policy.

The Pound-Yen exchange rate rose to a daily high at 146.24, having been as low as 145.37 earlier. The Dollar-Yen exchange rate hit a high at 111.42, having been as low as 110.75 earlier.

Recall the Yen had been on a tear higher since rumours were spread that a big change in policy was to be announced by the Bank.

The Bank of Japan adopted “forward guidance on policy rates” and said it would allow more flexibility in its bond operations, which should mean more volatility in JGB yields.

BoJ reiterated it will pursue a view to "persistently continuing with powerful monetary easing" and maintain “very low rate levels for an extended period of time” and increased the amount of Topix-linked ETFS it pledged to buy to JPY4.2trn from JPY2.7trn.

The Quarterly Report left little doubt about the policy bias, noting “risks to the price outlook are skewed to the downside”, “more time will be needed” to hit 2% and the risk of destabilising the financial system from a continued low rate environment “are not significant for now”

"When it comes to the July BoJ meeting, there was more than meets the eye – with the central bank making subtle, yet curious, tweaks to its unconventional policy artillery. But if anyone was in doubt, the super-easy BoJ policy is still very much in place; while officials will allow for greater flexibility in long-term yields," says analyst Viraj Patel at ING Bank N.V.

Patel says by firmly restating the annual ¥80trn JGB purchase target, the BoJ are showing no real appetite for a rapid rise in long-term yields (there was explicit aversion to this in the statement).

"What sealed the dovish deal was the guidance that the BoJ will ‘maintain very low rate levels for an extended period of time’ – which is not too dissimilar to what the ECB stated last month," adds Patel.

JGB yields declined as expected on a dovish BoJ, while USD/JPY price action has been choppy – albeit with the yen modestly lower as investors digest the news.

"We may see the pair drift up to 111.50-112.00 during Kuroda’s press briefing," says Patel.

The bearish case we set out for the GBP/JPY exchange rate in our recent technical analysis could be at risk of being invalidated as a break below the 143.195 lows "was seen to be key to advancing the bearish cause".

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