USD/JPY – Yen Plummets Despite BoJ Tweak

 | Oct 31, 2023 07:43AM ET

  • BoJ tweaks YCC, maintains 1% upper limit
  • Japanese yen sinks

    • The Japanese yen is sharply lower on Tuesday following the Bank of Japan policy meeting. In the European session, USD/JPY is trading at 150.65, up 1.06%.

    h2 BoJ Loosens Grip on Yield Cap/h2

    The Bank of Japan tweaked its yield control curve (YCC) policy on Tuesday, a small step that nevertheless sent the Japanese yen tumbling. The BoJ maintained its target for 10-year government bond yields at around 0% but redefined 1.0% as an “upper bound” rather than a hard cap. This increases flexibility around the YCC without actually raising the 1% upper limit. With the 10-year yield rapidly approaching the 1% cap (currently it is at 0.94%) the BoJ had to do something and opted for a looser definition of the upper limit rather than raise the cap to 1.5%. Significantly, the BoJ removed a pledge to defend the 1% level by purchasing an unlimited amount of bonds.

    The move failed to impress the markets, which viewed the tweak as a move towards dismantling the controversial YCC scheme. The yen took a massive hit after the meeting, as the BoJ stated it would “patiently” maintain its ultra-loose policy, which remains an outlier stance compared to other major central banks. The BoJ’s lack of transparency about its intentions continues to frustrate investors and is taking a toll on the yen, which is close to a 1-year low against the US dollar.

    Japan’s consumer inflation rate has been above the 2% target for some 18 months, and the BoJ revised upwards its inflation forecasts, as expected. There are growing expectations that the central bank will end negative interest rates next year, despite Governor Ueda’s insistence that the BoJ is not planning to shift rate policy.