The yen rallied after swinging wildly as the Bank of Japan announced an adjustment to its yield-curve control program that invites further buying of the currency.
(Bloomberg) — The yen rallied after swinging wildly as the Bank of Japan announced an adjustment to its yield-curve control program that invites further buying of the currency.
It jumped as much as 1% to 138.07 per dollar after weakening by about the same amount in a volatile hour of trading in wake of the BOJ’s policy statement Friday. Pressure had been mounting on the central bank to alter the policy amid elevated inflation and improved wage growth in Japan.
Japan’s benchmark 10-year yield surged 13.5 basis points to 0.575%, with the move supportive of the currency. The Nikkei 225 stock gauge dropped while bank shares rose on expectations of better margins.
“Doing away with the rigid yield limits opens the space for more policy adjustments in the coming months,” said Eugenia Victorino, head of Asia strategy at the bank in Singapore. “That would allow the yen to appreciate considering that the Fed is now near the end of its own tightening cycle.”
The Japanese currency had already surged and benchmark bond yields had breached the BOJ’s 0.5% cap ahead of the meeting, after the Nikkei reported that officials would discuss letting yields rise above the ceiling by a “certain degree.” The impact was also seen Treasury yields.
The International Monetary Fund said this week that Japan’s inflation risks were to the upside and that the BOJ should be flexible and perhaps move away from the yield-curve control. A gauge of inflation in Tokyo came in above expectations on Friday.
‘Hidden Motivation’
“My sense is that the hidden motivation for the BOJ is the exchange rate, because the too stringent conduct of YCC could invite undesirable yen weakening going forward,” said Kazuo Momma, former BOJ assistant governor and Mizuho Research and Technologies executive economist. “The BOJ doesn’t want to repeat the same mistake as it did last year so it’s more flexible this year.”
Friday’s statement from the BOJ kept the target for 10-year bond yields at around 0% and said its 0.5% ceiling on yield movements was a reference point not, a rigid limit. It also said it will aim to control yields flexibly and will buy 10-year bonds at 1% every business day.
“Foreign investors may interpret that the Bank of Japan has also scaled back its easing measures and buy the yen,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank. “Dollar-yen might see downward pressure as this is a makeshift measure allowing the interest rates to rise.”
–With assistance from Tania Chen, Matthew Burgess, Karl Lester M. Yap and Yasutaka Tamura.
(Updates price moves, adds comment.)
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