Morning commuters in front of the Bank of Japan (BOJ) headquarters in Tokyo, Japan, on Monday, Jan. 16, 2023. The Bank of Japan made no changes to its yield curve control policy on Wednesday.
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The Japanese currency weakened against the U.S. dollar after the Bank of Japan surprised markets by keeping its yield curve tolerance band unchanged.
The Japanese yen weakened 2.6% against the U.S. dollar after the choice was announced and last stood at 131.47, hovering at its strongest levels since June, 2022.
“Japan’s economy is projected to proceed growing at a pace above its potential growth rate,” the Bank of Japan said in an announcement. The central bank left its rate of interest unchanged at an ultra-dovish -0.1% – consistent with expectations and maintaining the identical rate it’s kept since 2016.
The choice to make no changes to its monetary policies comes after the central bank caught global markets off guard in its previous meeting by widening its tolerance range for the yield on its 10-year government bond from 25 basis points to 50 basis points in December.
For the reason that move last month, 10-year JGB yields have exceeded the upper ceiling several times.
The yield on the 10-year JGB exceeded the upper ceiling of its band for a fifth straight session on Wednesday morning and last stood at 0.507%.
‘Knee-jerk’ response
Nomura head of FX strategy Yujiro Goto said while the move could be a disappointing one for traders bullish on the Japanese yen, the weakening of the currency could also be temporary.
“I feel the initial response [for the yen reaching] 130 to 131, or potentially 132 is a knee-jerk response after the ‘no change’ today,” he said on CNBC’s “Street Signs Asia.”
“Within the medium term, over the subsequent 2-3 months, I feel the trend for the yen must be still on the downside towards 125, even after the frustration today,” he said,
Goto said the currency will strengthen on hopes of a policy shift within the near-term future, highlighting the nearing end of BOJ Governor Haruhiko Kuroda’s term.
“Markets should keep expecting [the BOJ] to tweak or change [its] monetary policy after some point, especially after Kuroda’s retirement,” he said.
Shigeto Nagai of Oxford Economics said the BOJ’s move to widen its band “fueled” expectations for more changes ahead.
“Today, the BOJ really desired to calm down that speculation and anticipation for normalization,” he said, adding the central bank will proceed to be pressed for change.
More pressure ahead
As inflation continues to rise in Japan, the central bank will face further pressure ahead of its leadership change.
“Inflation in Japan is doing something that it hasn’t done for 40 years,” Viraj Patel of Vanda Research said in a tweet, adding that the Bank of Japan risks “falling into” the identical trap because the U.S. Federal Reserve in labeling inflation as “transitory.”
The Bank of Japan used wording that was just like the Fed’s description of inflation before the U.S. central bank began repeatedly mountain climbing rates to tame rising prices, describing it as “pass-through.”
“The year-on-year rate of increase in the patron price index is more likely to be relatively high within the short run attributable to the consequences of a pass-through to consumer prices of cost increases led by an increase in import prices,” the central bank said in its latest statement.
The Bank of Japan revised its forecasts for 2023’s core inflation nationwide from 2.9% to three%. Nationwide inflation data is predicted Friday.