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Japanese yen advances ahead of BoJ meeting. Is the JPY finally out of trouble?

By Adrian Holliday

13:08, 19 December 2022

JPY: BOJ policy meet watch tomorrow – too soon for a policy switch?
From the 45th floor of the Tokyo Metropolitan Government Building; what will the BOJ meeting mean for JPY tomorrow? – Photo: Getty

Is the Bank of Japan (BOJ) about to get all reformist? Like scrapping negative rates and yield curve control? That’s radical stuff and while there’s rumours the BOJ may, at last, be preparing to de-anchor itself from the cheap money sea floor it has gripped itself to, the reality will likely be more banal, not to mention slower.

Jane Foley, senior FX strategist at Rabobank says the fallback in USD/JPY has snipped speculator pressure about nearing tweaks to policy “though there is still talk in the market over a potential change in the spring following Governor Kuroda’s departure”.

Is the Bank of Japan preparing to pivot and what might this mean for JPY?

Freeing a refusenik, slowly

Any hard policy swivel – which has the potential to detonate some of the bond market – mayhem for central bank reserves and some pension funds, even if a move is broadly yen-supportive – looks slim. Governor Kuroda steps down in April but his successor is likely to tweak, not twist. 

How might that look? There could be some BOJ nip and tucks– following a review, of course – to forward guidance perhaps; also perhaps more swivel, or room, around 10 year bond yields. 

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BOJ yield curve control in brief:

  • Currently Japanese short-term interest rates are guided around -0.1%.
  • The BOJ also promises to guide the 10-year bond yield at approximately around 0% bolted to an implied 0.25% cap.
  • Overall, it’s a policy that aims to keep inflation at around 2%.

 

Meanwhile tomorrow’s BoJ meeting looms; the yen approaches it following its October surge.

“The yen’s 2-month 10% surge – USD/JPY fell from 151.9 to 136 – has been fuelled by a number of factors, including the Japanese FX intervention, speculation about the Fed cutting interest rates next year, China’s reopening, and the rumours behind a BoJ hawkish tilt,” says Capital fx strategist Piero Cingari.

Yet some of these factors could crash into reverse in the coming weeks warns Cingari, leading to – again – more yen frailty. 

JPY rally fading?

“After a strong rally," he goes on, "Japan’s Ministry of Finance stopped its FX interventions; in December, the Fed signalled more hikes than the market was pricing in for next year and the number of cases of Covid infection and mortality in China has increased.” 

USD/JPY

151.22 Price
-0.070% 1D Chg, %
Long position overnight fee 0.0113%
Short position overnight fee -0.0195%
Overnight fee time 21:00 (UTC)
Spread 0.010

AUD/USD_zero

0.65 Price
-0.230% 1D Chg, %
Long position overnight fee -0.0073%
Short position overnight fee -0.0009%
Overnight fee time 21:00 (UTC)
Spread 0.00006

AUD/USD

0.65 Price
-0.220% 1D Chg, %
Long position overnight fee -0.0073%
Short position overnight fee -0.0009%
Overnight fee time 21:00 (UTC)
Spread 0.00006

GBP/USD

1.26 Price
-0.030% 1D Chg, %
Long position overnight fee -0.0046%
Short position overnight fee -0.0036%
Overnight fee time 21:00 (UTC)
Spread 0.00013

So a BOJ hawkish shift is unlikely before the end of the first quarter – at the very least. The process of selecting a successor governor and deputy happens between February and March.

Technically, USD/JPY is holding up strongly above the 200-day moving average, ruling out a reversal of more than 50% of the 2022 rally. This might indicate that bulls are resurfacing on dips, and sellers have become more exhausted here.

USD/JPY daily chart and technical analysis as of December 19, 2022 – Photo: Capital.com, Source: Tradingview

FX strategist and finance consultant at Keirstone, Francis Fabrizi 

  • USD/JPY dropped below 136.000 briefly this morning however it has managed to push above this level again indicating buyers could be ready to take control again.” 
  • “If price gains bullish momentum this week, it is possible we will see a break above 136.500 and reach 138.000 again. If 136.500 remains a strong resistance level, it is likely price will fall lower towards 134.500.” 
  • “My bias for this pair is still bullish overall as long as price stays above 134.500. A strong break below this level could indicate a bearish reversal.”

Clue drop?

Still, markets will be searching hard for clue drops from the BOJ tomorrow and Wednesday. On 1 December BoJ board member Naoki Tamura said he thought it “appropriate to conduct a review at the right time, including the monetary policy framework and inflation target”.

“He did add it was difficult to decide ‘the right time’” says Derek Halpenny, head of research at MUFG Bank “and whether any change would be the conclusion.” 

Since then Nakamura has stated now isn’t the right time. So while Tamura’s words suggest review appetite is building, “we doubt this will be announced next week. Indeed, we see it as more likely that Governor Kuroda will push back firmly”.

More yen selling?

“Push-back from Gov Kuroda next week after the hawkish messages this week from the Fed and ECB could prompt some renewed yen selling.”

“However,” adds Halpenny, “the market is likely to still anticipate a BoJ policy change next year, which we believe will curtail any yen sell-off – the trend has turned and we expect yen appreciation in 2023.”

    Mid-morning pre BoE decision DXY was 0.17% lower at 104.23 while EUR/USD was 0.23% up at 1.0610; GBP/USD was 0.35% higher at 1.2166 while USD/JPY was 0.17% lower at 136.48.

    Markets in this article

    USD/JPY
    USD/JPY
    151.222 USD
    -0.107 -0.070%
    EUR/USD
    EUR/USD
    1.08001 USD
    -0.00255 -0.240%
    GBP/USD
    GBP/USD
    1.26356 USD
    -0.0004 -0.030%
    DXY
    US Dollar Index
    104.146 USD
    0.159 +0.150%

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