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The BOJ Disappoint

Today, the Bank of Japan (BoJ) announced that it would be leaving its Yield Control System (YCC) policy settings unchanged, which caused the yen to weaken by 2% against other major currencies. The market had expected the BoJ to make changes to its YCC policy, but this did not happen. Hence the big adjustment in the currency markets during the overnight session. The market may continue to speculate that changes to the YCC policy will be made at upcoming meetings, but the next one is not until March 10th.

The End of Day strategy has been following the USDJPY trend lower since early November 2022. Today's action hasn't either stopped us out of the position or caused a reversal pattern. In fact, the price action currently appears to be backfilling the January 12th drop and could still be targeting the stops below 126.36.

The YCC policy is a key policy tool that the BoJ uses to control short-term interest rates and stabilize the economy. The BoJ sets a target level for the 10-year Japanese Government Bond (JGB) yield, and then buys or sells JGBs in order to keep the yield at the target level. The BoJ has been using this policy since 2016, and it is one of the key ways that the BoJ has been able to keep interest rates low and stimulate economic growth.

Short-term models have been signaling that the yen was more significantly overvalued based on the 10-year JGB yields remaining below 0.50%. This has caused some concerns over the functioning of the JGB market, which has required the BoJ to purchase record amounts of JGBs to defend the 10-year JGB yield target. Furthermore, the upcoming end of Governor Kuroda's term at the end of April will continue to encourage speculation over a shift in policy under new leadership. In these circumstances, the yen sell-off should prove temporary, and we maintain a bullish outlook for the yen in the year ahead.

At the accompanying press conference, Governor Kuroda emphasized that the sustainable achievement of their inflation goal is not yet in sight, providing justification to maintain loose policy settings. The BoJ's updated inflation projections were raised marginally, but still forecast inflation remaining comfortably below their 2.0% target by the end of the forecast period.

What was not talked about today included Japan's dependency on energy imports. The country is subjected to the price fluctuations of WTI and as of late the price of oil per barrel has been coming down. The inflation that has been seen in the Japanese economy is not stable and will come lower if WTI prices continue to drop.

Investors may want to consider the following actions with the new information that the BoJ has left its Yield Control System (YCC) policy settings unchanged:

  1. Currency trading: Investors could take advantage of the yen's weakness and buy other major currencies such as the US dollar, Euro, and others, as the USD/JPY rate initially climbed to an intra-day high of 131.58.

  2. Hedging: Investors with exposure to the Japanese stock market may want to consider hedging their positions by buying yen put options, currency forwards, or other hedging instruments to mitigate potential currency risks.

  3. Wait and Watch: Russia and Ukraine will be going at it again in the spring of 2023, this could upset the energy markets again. The yen will no doubt weaken if this happens.

  4. Around the same time as point 3, we should keep an eye on the end of Governor Kuroda's term: The upcoming end of Governor Kuroda's term at the end of April may also encourage speculation over a shift in policy under new leadership.


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