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Why is the Japanese Yen soaring?

Why is the Japanese Yen soaring?

In our latest Week Ahead article (posted on Fridays), we posed the question:

“Can USDJPY break below its 200-day SMA?”

We now have the answer: Yes!


But not only did this FX pair go beyond that widely-watched technical indicator, it smashed right past!

Today, the Japanese Yen surged by nearly 4% against the US dollar before slightly paring its gains versus the greenback at the time of writing.

USDJPY even briefly dipped just below the132.0 mark, with JPY bulls hoping to secure a daily close below that psychologically-important level.


Consider also how the JPY index, which measures the Yen’s performance against six of its G10 peers, has also skyrocketed to a 4-month high!


These big JPY moves are in response to a totally unexpected move by the Bank of Japan today!


How did the Bank of Japan shock markets?

Coming into its final policy meeting of 2022, the BoJ was widely expected to keep its policy settings untouched.

To be fair, Japan’s central bank did keep its policy bank rate at -0.10% and its 10-year yield target was also left at zero percent …

except …

Shocker: the BoJ doubled the limit / cap on yields for Japanese 10-year government bonds now up to 0.50%.


Why does this matter? How could higher Japanese yields impact markets?

  1. Higher Japanese yields, stronger Japanese Yen

Recall that, as an oversimplification, rising yields tend to be accompanied by currency strength.

Hence, with the BOJ allowing 10-year yields to rise, this BoJ move was met with a surge in the Japanese Yen.

After all, suppressed Japanese yields have been one of the main reasons why the Yen has struggled in 2022 and is still (barely) the worst-performing G10 currency against the US dollar so far this year.

Though that title (worst G10 performer) could be handed over to the Swedish Krona (SEK) soon, if the Japanese Yen can keep extending today’s advance into the final trading day of 2022.

READ MORE: (21 April 2022) Why is the Yen so weak?


  1. Selloff in global stocks / bonds?

Japan is the world’s biggest creditor (which means that the world owes Japan a lot of money).

According to the IMF, as of September 2021, Japanese investors held about US$3.4 trillion worth of assets overseas.

That’s enough money to buy up all of Apple, Alphabet, and Nike (using today’s much-lowered valuations)!

Hence, in light of today's decision by the BoJ, onshore investors could be tempted to bring some of that money back home to take advantage of those raised yields in Japan.

The repatriation of such funds (presumably to take advantage of higher Japanese yields) may translate into further selling of such foreign assets (e.g. US stocks and bonds).


Is the BoJ ready to pivot?

BoJ Governor Haruhiko Kuroda went to great lengths today to insist that today's policy tweak should not be seen as the equivalent of a rate hike.

NOTE: Bond yields tend to move higher when interest rates go up.

Yet, markets are interpreting today's move as a sign that the BoJ is ready to "normalise" its policy settings.

After all, central bankers around the world have been furiously hiking rates this year, while the BoJ keeps theirs at minus 0.1%.


Here's one last reference (I promise) to last Friday's Week Ahead article, which carried this line:

" ... the mere hint that the BOJ is finally ready to hop onto this global policy tightening bandwagon could jolt the Japanese Yen."

And sure enough, that's exactly what happened today.

Instead of yesterday's forecasts for two BOJ rate hikes by September 2023, markets have now priced in 3 rate hikes by then (Q3 2023), lifting JPY alongside such raised expectations.


Can the Yen climb even higher?

Overall, if markets build on this idea (or if the BoJ fails to quash such a notion) that today's move is truly a precursor to the BoJ's eventual exit out of negative interest rates ...

that should pave the way for USDJPY to trade in sub-130 region in the months ahead.

In light of today's BoJ shocker, markets have almost doubled the odds of USDJPY trading below 130.0 in Q1 2023, from 23% yesterday, now up to 44%.



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