USD/JPY Fundamental Daily Forecast – Plunges after BOJ Makes Unexpected Change to Yield Curve Policy

The Dollar/Yen is sharply lower on Tuesday after the Bank of Japan (BOJ) held its benchmark interest rate steady and announced it will modify its yield curve control band, the central bank said in a statement.

The BOJ will expand the range of 10-year Japan government bond yield fluctuations from its current plus and minus 0.25 percentage points to plus and minus 0.5 percentage points, it said.

The adjustment is intended to “improve market functioning and encourage a smoother formation of the entire yield curve, while maintaining accommodative financial conditions,” the BOJ said.

At 06:25 GMT, the USD/JPY is trading 132.872, down 4.038 or -2.95%. On Monday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $68.08, down $0.15 or -0.22%.

BOJ Announces Surprise Change to Yield Curve Policy

The BOJ shocked markets on Tuesday with a surprise tweak to its bond yield controls that allows long-term interest rates to rise more, a move aimed at easing some of the costs of prolonged monetary stimulus, Reuters reported.

The move triggered a spike higher in Japanese Government bond yields and the Japanese Yen, meanwhile Nikkei shares tanked. Investors were caught off guard because many had expected the BOJ to make no changes to its yield curve control (YCC) until Governor Haruhiko Kuroda steps down in April.

The Details of the BOJ Move

In a move explained as aimed at breathing life back into a dormant bond market, the BOJ decided to allow the 10-year bond yield to move 50 basis points either side of its 0% target, wider than the previous 25 basis point band, according to Reuters.

But the central bank kept its yield target unchanged and said it will sharply increase bond buying, a sign the move was a fine-tuning of existing ultra-loose monetary policy rather than a withdrawal of stimulus.

Short-Term Outlook

The surprise move by the BOJ is driving the Japanese Yen higher, suggesting that perhaps the sharp drop in the currency throughout the year was making policymakers too uncomfortable.

Additionally the BOJ’s ultra-low rate policy and its relentless bond buying to defend its yield cap have drawn increasing public criticism for distorting the yield curve, draining market liquidity and fueling an unwelcome yen plunge that inflated the cost of raw material imports.

Ahead of a press conference by Kuroda, traders were questioning the timing of the move since he had repeatedly said he saw no need for the BOJ to tweak YCC, including taking immediate steps to address the side-effects such as the distortion it was creating in the bond market.