BOJ – Fed Policy Divergence Remains Supportive for USD/JPY

The Dollar/Yen finished nearly flat on Thursday as Japan’s central bank pledged to ramp up scheduled bond purchases in the second quarter, signaling it will continue to aggressively defend its yield cap against the global tide of higher interest rates. With the Fed expected to put on a hawkish front, the U.S. Dollar is expected to continue to remain favored over the Japanese Yen. This puts the Dollar/Yen in the “buy the dip” mode.

On Thursday, the USD/JPY settled at 121.700, down 0.127 or -0.10%. The Invesco CurrencyShares Japanese Yen Trust ETF (FXY) closed at $76.95, up $0.01 or +0.01%.

New Bank of Japan Bond Buying Schedule

Traders are eyeing the current BOJ bond buying schedule for the April to June period for direction. According to reports, the central bank said it will increase purchases for government bonds across the yield curve compared with the current quarter.

This means the USD/JPY is likely to be underpinned since the Fed is expected to raise its benchmark rate at least two times during the same period and could even opt for a 50-basis point hike at one of the meetings.

“We decided to increase bond purchases for a wide range of durations, from short- to super-long zones, as the yield curve remained under upward pressure,” a BOJ official told Reuters.

Japanese Government Bond Yields Could Stabilize Over Short-Run

Now that the BOJ has revealed its plans for the next three months, Japanese Government Bond (JGP) yields could stabilize, which would take some of the upward pressure off the USD/JPY.

We saw evidence of this on Thursday when the 10-year JGB yield fell half a basis point to 0.210%, after rising to as high as 0.225% on Thursday. Longer-term yields retreated sharply, with those for 20-year JGB’s falling 9.5 basis points to a two-year low of 0.670%. The 30-year JGB yield fell 8 basis points to 0.920%.

Short-Term Outlook

While the BOJ may gain control of JGB yields over the short-run, the real problem is policymakers don’t have any control over the direction of U.S. Treasury yields. If U.S. yields continue to move sharply higher then Japanese yields are likely to follow, meaning the BOJ will have to continue its bond buying spree.